Chap 4

CHAPTER 4
RECONSTITUTION OF A PARTNERSHIP FIRM

RETIREMENT AND DEATH OF A PARTNER
LEARNING OBJECTIVES
After studying this chapter you will
be able to :
l
Calculate new profit-sharing

ratio and gaining ratio.
Describe the accounting

treatment of goodwill in the
event of retirement/death of a
partner;
Explain the accounting

treatment for revaluation of
assets and reassessment of
liabilities;
Explain the accounting

treatment with respect to the
joint life policy;
Ascertain
the
retiring/
deceased partner's share in the
firm and its settlement;
Prepare the retiring/deceased

partner's loan account;
Prepare the Balance Sheet of

the reconstituted firm.
On the retirement or death of a partner,

the existing partnership deed comes to
an end. In its place the new partnership
deed needs to be framed, i.e. the firm
requires reconstitution. The remaining
partners shall continue to do their
business but on the different terms and
conditions. There is not much difference
in the accounting treatment at the time
of retirement or in the event of death as
retiring/deceased partner will no longer
be a partner of the reconstituted firm.
In both cases, we are required to
determine the sum due to the retiring
partner (in case of retirement) and to the
legal representatives in case of deceased
partner. The retirement may take place
with the consent of all other partners,
in accordance with terms of the deed
(i.e. there may be express agreement to
that effect) or in case of retirement at
will or by giving notice in writing by a
partner desiring to do so.
139
4.1 Ascertaining the amount of sum due to

Retiring/Deceased Partner
The sum payable to the retiring/deceased partner includes
l
Balance in his capital/current account;
Share of accumulated profits (losses) and reserves;
Share in the gain/loss on revaluation of assets and reassessment of

liabilities;
Share of goodwill;
Share in the profits of current year;
Share in joint life policy;
Interest on capital, salary, etc. from the date of last balance sheet to
the date of death/retirement (if applicable) will be credited to him,
drawings and interest on drawings will also be debited for the required
time period to the concerned partner's capital account.
At the time of retirement or death of a partner, we need to compute the

new profit sharing ratio and gaining ratio among the continuing partners.
This will enable us to carry out the following adjustments :
l
Goodwill
Revaluation of assets and reassessment of liabilities
Distribution of accumulated profits (losses) and reserves
Capital adjustments (if any).
The above adjustments will help us to ascertain the amount due to retiring/
deceased partner.
4.1.1 Calculation of New Profit Sharing Ratio
New profit sharing ratio is the ratio in which the remaining partners will share
profits (excluding retiring/deceased partner). The new share of each of the
remaining partners will consist of his own share in the firm plus share acquired
from the retiring/deceased partner. At the time of retirement or death of a
partner, the share of retiring/deceased partner is acquired by existing partners,
on the basis of agreement among them. If the continuing partners decide to
acquire the share of retiring/deceased partner in old profit sharing ratio, then
ACCOUNTANCY
140
there is no need to compute the new profit sharing ratio, since it will be
same as the old profit sharing ratio among them.
In the absence of any information regarding profit sharing ratio in which
the continuing partners will share in profit of the retiring/deceased partner,
it is assumed that they will acquire his share in old profit sharing ratio (as
shown in illustration 1).
If the continuing partners acquire the share in profits of the retiring/
deceased partner in a proportion other than their old ratio, then we need to
compute the new profit sharing ratio. In this case, the new share of a continuing
partners, in profits will be total of their respective old share and share acquired
from the retiring/deceased partner.
New share of the continuing partner = Their respective old share + Share acquired
from outgoing partner
l
Gaining Ratio
The ratio in which the continuing partner have acquired the share from the
retiring/deceased partner is called gaining ratio.
Gain of continuing partner = New share Old share
It is to be noted that the continuing partners may also sacrifice on

retirement/death of a partner if the partner sells his share to any of the
continuing partner. In that situation the gaining ratio of that partner will have
minus sign, thereby indicating that he has also sacrificed a part of his profit.
If continuing partners decide to acquire the share of retiring/deceased
partner in their old profit sharing ratio, then the gaining ratio will be same as
their old profit sharing ratio among them. (as shown in illustration 1). If the
ratio in which the continuing partners will share the profits is given then the
gaining ratio will be computed by subtracting the old share from the new
share of the partner. If the continuing partners acquire the share of the retiring/
deceased partner in a proportion other than their old profit sharing, then the
ratio in which they have acquired the share of profit from the retiring/deceased
partner is the gaining ratio.
Illustration 1 (Calculation of new profit sharing ratio and gaining ratio)
Sita, Rita and Raj are partners sharing profits in the ratio of 5:3:2. Calculate
new profit sharing ratio and gaining ratio if : (i) Sita retires, (ii) Raj retires, and
(iii) Rita retires.
141
Solution
I.
Calculation of New Profit Sharing Ratio

(i)
New share of Rita and Raj (If Sita retires) :

In order to calculate new ratio of Rita and Raj, it is assumed that Sita's share of
5
will be taken up by Rita and Raj in their old profit sharing ratio inter se.
10
Rita's new share
3
5
3
3
15
30
+(
)=
+
=
10
10
5
10
50
50
Raj's new share
2
5
2
2
10
20
+(
)=
+
=
10
10
5
10
50
50
Therefore, New profit sharing ratio = 3 : 2

(ii)
New share of Sita and Rita (If Raj retires) :

In this case it is assumed that Raj's share of
2
will be taken up by Sita and Rita
10
in their old profit sharing ratio.

Sita's new share
5
2
5
5
10
50
+(
)=
+
)=
10
10
8
10
80
80
Rita's new share
3
2
3
3
6
30
+(
)=
+
)=
10
10
8
10
80
80
Therefore New profit sharing ratio
5:3
(iii) New share of Sita and Raj (If Rita retires) :

In this case, it is assumed that Rita's share of
3
will be taken up by Sita and
10
Raj in their old profit sharing ratio.

Sita's new share =
5
3
5
5
15
50
+(
)=
+
=
10
10
7
10
70
70
Raj's new share =
2
3
2
2
6
20
+(
)=
+
=
10
10
7
10
70
70
Therefore new sharing ratio is 5 : 2
ACCOUNTANCY
142
II.
Calculation of Gaining Ratio

(i)
Gaining ratio of Rita and Raj :

Rita's gain = New share Old share
3
3
3
=
5
10
10
Raj's gain = New share Old share

2
2
2
=
5
10
10
Therefore, the gaining ratio of Rita and Raj will be 3: 2
(ii)
Gaining ratio of Sita and Rita :

Sita's gain = New share Old share
5
5
20 - 25
5
=
=
8
10
40
40
Rita's gain
3
3
3
=
8 10
40
Therefore, the gaining ratio of Sita & Rita will be 5 : 3

(iii) Gaining ratio of Sita and Raj :
Sita's gain = New share Old share
5
15
5
=
10
70
7
Raj's gain = New share Old share

2
2
=
7 10
6
70
Therefore, gaining ratio of Sita and Raj will be 5 : 2.
Illustration 2 (Calculation of new profit sharing ratio)

Ajay, Vijay and Veena are partners sharing profits in the ratio of 3:2:1. Ajay
retires and his share is taken up by Vijay and Veena : (i) equally, (ii) in the ratio
of 3 : 2. Calculate the new profit sharing ratio.
143
Solution
(i)
When Ajay's share is taken up equally by Vijay and Veena

Vijay's share in profit
2
6
Share acquired from Ajay
3
3 1
=
6 2 12
New share of Vijay
2
3
7
+
=
6 12
12
Veena's share in profit
1
6
3 1
3
=
6 2 12
Veena's new share
3
1
5
+
=
6
12 12
Therefore, Ratio of Vijay and Veena 7 : 5

(ii)
When Ajay's share is taken up in 3 : 2 ratio

Vijay's share in profit
2
6
3 3
9
=
5 6 30
Vijay New share
9 19
2
=
= +
6
30
30
Veena's share
2
3
6
=
5
6 30
Veena's new share
1 6
11
+
=
6 30 30
1
6
Therefore, Ratio of Vijay and Veena 19 :11
ACCOUNTANCY
144
Illustration 3 (Calculation of new profit sharing ratio and gaining ratio)

Mahesh, Naresh and Onkar are partners sharing profits in the ratio of 3/8,
1/2 and 1/8. Mahesh retires and surrenders 2/3 of his share in favour of
Naresh and remaining in favour of Onkar. Calculate new ratio and gaining
ratio.
Naresh
Onkar
(i)
Existing Share
1
2
1
8
(ii)
Share acquired by Naresh
2
3
3
8
(1
and Onkar from Mahesh
2
8
1
2
+
2
8
(iii) New Ratio = i + ii
6
8
2
3
)
3
8
1
8
1
1
+
8
8
2
8
i.e. 6 : 2
or 3 : 1
(IV) Gaining Ratio =
2 : 1 [As Calculated in (ii)]
Illustration 4 (Calculation of new profit sharing ratio)

Kamlesh, Lalit, Manoj and Naveen are partners sharing profits in the ratio of
3:2:1:4. Kamlesh retires and his share acquired by Lalit and Manoj in the ratio
of 3:2. Calculate new ratio and gaining ratio.
Solution
Calculation of new profit sharing ratio
(i)
Old share
Lalit
Manoj
Naveen
2
10
1
10
4
10
(ii)
Acquisition of Kamlesh's share
145
3
3
10
5
=
(iii) New Ratio (i) + (ii)
i.e. the new profit sharing ratio is :

Note :
9
50
3
2
10
5
--
6
50
9
2
+
10
50
1
6
+
10 50
4
10
19
15
11
50
20
50
19
11
:
:
20
Since Lalit and Manoj are acquiring Kamlesh's share of profit in the ratio 3:2, hence,
the gaining ratio will be 3:2 between Lalit and Manoj.
4.1.2 Treatment of Goodwill

The retiring/deceased partner is entitled to his share of goodwill at the time of
retirement/death because the goodwill has been earned by the firm with the
efforts of all the existing partners. At the time of retirement/death of a partner,
goodwill is valued as per agreement among the partners. Since the retiring/
deceased partner will not be sharing the future profits of the firm, a part of
which might be accruing because of the present value of goodwill. Therefore,
in all fairness, the retiring/deceased partner should be compensated for the
same by the continuing partners in their gaining ratio. For this purpose, the
retiring/deceased partner's capital will be credited. In this case the following
journal entry is recorded :
Continuing partner's capital a/c (in the gaining ratio)
Retiring/deceased partner's capital a/c
Dr.
(with his share of
goodwill)
The idea here is to credit retiring/deceased partner's capital account with

his share of goodwill and debit the capital accounts of continuing partner who
will gain on the retirement or death of partner, in their gaining ratio.
It is worthmentioning here that if any of the remaining partners has also
agreed to sacrifice some share in the profits of the firm on retirement/death of
a partner, his capital account will also be credited along with retiring partner's
capital with his proportion of sacrifice and continuing partner's capital are
ACCOUNTANCY
146
debited who have gained on retirement/death of a partner by recording the

following entry :
Continuing partner's capital a/c ( who have gained )
Retiring/deceased partner's capital a/c
Dr.
Continuing partner's capital ( who sacrificed )
The goodwill is valued for this purpose on the basis of agreement among
the existing partners. (This has been discussed in detail in Chapter 1).
l
Hidden Goodwill
If the firm has agreed to settle the account of retiring/deceased partner by

paying him a lump-sum amount, then amount paid to him in excess of his
capital and share in reserves/revaluation account etc. shall be treated as his
share of goodwill. For example, P,Q and R are partners. R retires, his capital
account, after making adjustments for reserves and profit on revaluation exists
at Rs. 64,000. P and Q have agreed to pay him Rs. 80,000 in full settlement of
his claim. It implies that Rs.16,000 is R's share in the goodwill of the firm. This
will be treated by debiting Rs.16,000 in P & Q's capital account in their gaining
ratio and crediting R's capital account.
Illustration 5 (Goodwill)
Om, Jai and Jagdish are partners sharing profits in the ratio 5:3:2. Om retires
and goodwill is valued at Rs. 50,000. New profit sharing ratio of continuing
partners will be equal. Record necessary journal entry.
Solution
Journal
Date
Particulars
Jai's Capital a/c

Dr.
Jagdish's Capital a/c
Dr.
Om's Capital a/c
(Om's share of goodwill credited to him)
L.F.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
10,000
15,000
25,000
147
Notes to the Solution

Gain of partner
New share Old share
Jai's old share
3
10
Jai's new share
1
2
Jai's gain
1
3
2
=
2
10
10
Jagdish's old share
2
10
Jagdish's new share
1
2
Jagdish's gain
1
2
3
=
2
10
10
Therefore, gaining ratio is 2 : 3.
Shashi, Madhu, Usha and Renu are partners sharing profits in ratio of 3:2:3:2.
On the retirement of Usha, goodwill was valued at Rs. 1,20,000. Usha's share
of goodwill will be given to her by adjusting it into the capital accounts of
Shashi, Madhu and Renu. Record necessary entry for the treatment of goodwill
when new profit sharing ratio decided is 3 :1: 6.
Solution
In the Books of Shashi, Madhu, Usha and Renu
Journal
Date
Particulars
Renu's Capital a/c

Dr.
Madhu's Capital a/c
Usha's Capital a/c
(Madhu and Usha have sacrificed their share,
and Renu has gained on retirement of Usha)
L.F.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
48,000
12,0001
36,0002
ACCOUNTANCY
148

(I)
Gain of a Partner = New share Old share

Shashi's gain =
3
3
= 0 (New share is same as old share)

10
10
Madhu's gain =
1
2
1
= (
) (sacrifice)
10
10
10
Renu's gain =
(II)
6
2
4
=
10
10
10
Transfer of goodwill to partners capital account

Rs. 1,20,000
1
= Rs. 12,0001
10
Rs. 1,20,000
3
= Rs. 36,0002
10
Sangeeta, Usha and Rita are partners sharing profits in the ratio of 3:2:1.
Usha wants to retire due to her ill health. For this purpose goodwill is valued
at two years purchase of average super profits of last three years, The profit
for the last three years are as under :
First year
Second year
Third year
: Rs. 36,600
: Rs. 43,600
: Rs. 48,800
The normal profits for similar firms is Rs. 34,000.

Record necessary entry for goodwill on retirement of Usha.
Solution
Books of Sangeeta,Usha and Rita
Journal
Date
Particulars
Sangeeta's capital a/c

Dr.
Rita's capital a/c
Dr.
Usha's capital a/c
(Goodwill credited to her capital account)
L.F.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
4,500
1,500
6,000
149

2
= Rs. 6,000
6
Usha's share of goodwill
Rs. 18,000
Average profits
Rs. (36,600 + 43,600 + 48,800)/3 = Rs. 43,000
Super profits
Average profits Normal profits
Rs. 43,000 Rs. 34,000= Rs. 9,000
Super profits No. of years purchase
Rs. 9,000 2= Rs. 18,000
Goodwill
4.1.3 Revaluation of Assets and Reassessment of Liabilities

At the time of retirement/death some of the assets may not have been shown
at their current values. Similarly, there may be certain liabilities which have
been shown at a value different from the obligation to be met by the firm.
Besides this, there may be unrecorded assets and liabilities which have to be
recorded. To ascertain net gain (loss) on revaluation of assets and/or
reassessment of liabilities, "Revaluation account" is prepared. This gain (loss)
is transferred to the capital account of all partners including retiring/deceased
partner in their old profit sharing ratio. For this purpose, the following journal
entries are recorded :
(i)
For increase in assets

Assets a/c
Revaluation a/c
(ii)
(individually)
Dr.
(individually)
For decrease in liabilities

Liabilities a/c
Revaluation a/c
(v)
Dr.
For increase in liabilities

Revaluation a/c
Liabilities a/c
(iv)
(individually)
For decrease in assets :

Revaluation a/c
Assets a/c
(iii)
Dr.
Dr.
(individually)
For recording unrecorded assets

Unrecorded assets a/c
Revaluation a/c
Dr.
ACCOUNTANCY
150
(vi)
For recording unrecorded liabilities

Revaluation a/c
Unrecorded liabilities a/c
Dr.
(vii) For distribution of profit on revaluation

Revaluation a/c
Dr.
All partners' capital a/c (in old profit sharing ratio)
OR
for loss on revaluation
All Partners' Capital a/c
Revaluation a/c
Dr.
Note : Entries (i), (ii), (iii) and (iv) are to be recorded with the amount of increase or decrease
in assets and liabilities only.
All partners mean including retiring/deceased partner.
4.1.4 Distribution of Accumulated Profits (losses) and Reserves

Accumulated profits (losses) and reserves as shown in the Balance Sheet of
the firm on the retirement/death of a partner belongs to all the partners and is
transferred to their capital accounts in old profit sharing ratio. Similarly, at
times, the firm might have created some specific funds like workmen's
compensation fund or investment fluctuation fund to meet certain obligations
which may arise in future. At the time of retirement/death of a partner, this
fund may or may not be required to meet the obligation. The excess, if any,
that is not required is called "Surplus" and will be transferred to capital accounts
of all the partners in their old ratio. For the purpose, the following journal
entries are recorded :
(i)
For distributing Reserves and Accumulated Profits, etc.

Reserves a/c
Profit and loss a/c (Profits i.e. credit balance)
All partners' capital a/c (individually)
(ii)
Dr.
Dr.
For distributing losses among all partners in the old ratio

All Partners, Capital a/c
P&L a/c (accumulated losses, i.e. debit balance)
Deferred Revenue Expenditure a/c
Dr.
(iii) Surplus of specific funds transferred to partner's capital account

Workman's Compensation Fund a/c
Investment Fluctuation fund a/c
All Partners' capital a/c
Dr.
Dr.
151
Illustration 8 (Treatment for profit and loss)

M, K and A are partners sharing profits in proportion of 3/6, 2/6 and 1/6. M
decides to retire due to her marriage. On the date of her retirement, firm's
abstract Balance Sheet was as under. How will you treat the profit and loss
account shown in the Balance Sheet.
Balance Sheet as
Liabilities
Capitals :
M
K
A
Total
Amount
(Rs.)
10,000
6,000
4,000
at
Assets
Amount
(Rs.)
Cash
Profits and Loss
14,000
6,000
Total
20,000
20,000
20,000
Solution
Books of M, K and A
Journal
Date
Particulars
M's Capital a/c

Dr.
K's Capital a/c
Dr.
A's Capital a/c
Dr.
Profit and loss a/c
(Loss of Rs. 6,000 divided among all partners
in their profit sharing ratio i.e. 3:2:1)
L.F.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
3,000
2,000
1,000
6,000
Illustration 9 (Revaluation of assets and reassessment of liabilities)

Gita, Sunita and Shahnaaz are equal partners. Gita retire and the Balance
Sheet of this firm on that date is as under :
ACCOUNTANCY
152
Balance Sheet as
Liabilities
Amount
(Rs.)
Creditors
Reserve
Workman's Compensation
Fund (WCF)
Capitals :
Gita
10,000
Sunita
15,000
Shahnaaz
20,000
Profit and loss
5,500
3,000
45,000
6,000
Total
61,000
1,500
at
Assets
Amount
(Rs.)
Cash
Debtors
Furniture
Plant
Patents
4,000
16,000
15,000
20,000
6,000
Total
61,000
On retirement it was found that patents were valueless, furniture is to be

brought down to Rs.13,000 and plant is reduced by Rs. 4,000 and there was
no liability on account of workman's compensation fund. Record necessary
entries at the time of retirement.
Solution
Books of Gita Sunita and Shahnaaz
Journal
Date
Particulars
L.F.
Reserve a/c
Dr.
Workman conpensation fund a/c
Dr.
Profit and loss a/c
Dr.
Gita's capital a/c
Sunita's capital a/c
Shahnaaz' a/c
(Free reserves distributed among partners)
Revaluation a/c
Furniture a/c
Plant a/c
Patents a/c
(Decrease in assets recorded)
Dr.
Gita's capital a/c

Sunita's capital a/c
Shahnaaz's capital a/c
Revaluation a/c
(Loss on revaluation recorded in the
Dr.
Dr.
Dr.
capital accounts of partners)
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
3,000
1,500
6,000
3,500
3,500
3,500
12,000
2,000
4,000
6,000
4,000
4,000
4,000
12,000
153
4.1.5 Disposal of the amount due to the retiring/deceased partner

The outgoing partner's account is settled as per terms of partnership deed, i.e.
in lump sum immediately or in various installments with/without interest as
agreed or partly cash immediately and partly in instalments at the agreed
intervals.
In the absence of any agreement, section 37 of the Indian Partnership Act,
1932 is applicable, which says that outgoing partner is at liberty to receive
either interest @ 6% p.a. till the date of payment or the share of profits which
has been earned with his money.
A. Disposal of the amount due to retiring partner :

1.
Retiring partner may be paid cash in full and following entry will be
recorded.
Retiring partner's a/c
Dr.
Cash/Bank a/c
2.
When retiring partner is partly paid in cash and the remaining amount
will be treated as loan. The entry for the purpose is as under :
Retiring partner's/capital a/c
Cash/Bank a/c
Loan
3.
The loan account can now be settled by recording following

entries :
(i)
(ii)
For the interest becomes due on due date :

Interest on loan a/c
Loan
Dr.
For payment of instalment on due date

Loan
Cash/Bank a/c
B.
Dr.
Dr.
Disposal of the amount due to the deceased partner :

(a) The amount standing to the credit of deceased partner's capital is
transferred to his executor's account, by recording the following entry :
Deceased partner's capital a/c
Dr.
Deceased partner's executor's a/c
Deceased partner's executor's account will be settled as per the

agreement between the firm and executor's of the deceased partner.
ACCOUNTANCY
154
(b) When the full amount is paid in cash, following entry is recorded:
Executor's a/c
Dr.
Cash/Bank a/c
(c)
When the settlement is made in instalments, the following entries are

made :
(i)
For interest due :

Interest on executor's a/c
Executor's a/c
(ii)
Dr.
For payment of instalment on loan account

Executor's a/c
Cash/Bank a/c
Dr.
Partners' Capital Accounts

Dr.
Cr.
Date
Particulars
J.F.
Drawings
Interest on drawings
Profit & Loss (Loss)1
Revaluation (Loss)2
Balance c/f
(for retiring partner's
balance)
Executor's a/c
(For deceased
partner's balance)
Total
Amount
(Rs.)
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
****
****
Date
Particulars
Bal. b/f
Remaining partner's
Capital account
(compensation on
account of goodwill)
P and L (Profits)1
Reserve Fund
Interests on Capital
Joint Life Policy
Revaluation Profits2
Total
J.F.
Amount
(Rs.)
****
****
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Format of the retiring/deceased partner's capital account.
4.1.6. Capital Adjustment

There is no binding on the partners to contribute in proportion to their profit
sharing ratio. But at the time of retirement/death of a partner, the remaining
partners may decide to keep their capital contributions in their profit sharing
ratio. In such a situation, the sum of balances in the capitals of continuing
partners will be worked out which will be the total capital of the new firm. To
ascertain the new capital of the continuing partners, total capital of the firm is
divided as per the new profit sharing ratio. The new capitals are then compared
1,2
There can either be gain or loss on account of these items.
155
with the balances in the capital accounts in order to work out surplus or
deficit in the individual capital account. Surplus or deficit to be withdrawn/
brought in cash as the case may be, the following entries will be recorded :
(i)
For surplus capital withdrawn by the partner :

Partners' capital a/c
Cash/Bank a/c
(ii)
Dr.
For deficit brought in by the partner :

Cash/Bank a/c
Partners' capital a/c
Dr.
Illustration 10 (Capital Adjustment)

A, B and C are partners in a firm sharing profits in the ratio of 3 : 2 : 1. B
retires. After making all adjustments relating to revaluation, goodwill and
accumulated profits, etc. the capital account of A showed a credit balance of
Rs. 80,000 and that of C Rs. 40,000. It was decided to adjust the capitals of A
and C in their profit sharing ratio. You are required to calculate the new capital
of the partners and record necessary entry for surplus/deficit.
Solution
(I)
Calculation of new capital of partners

(i)
Balance in A's capital
Rs.
80,000
(ii)
Balance in B's capital
40,000
(iii) Total capital of the new firm (i + ii)
= 1,20,000
(iv)
A's new capital = 1,20,000
3
4
= 90,000
(v)
C's new capital = 1,20,000
1
4
= 30,000
(vi)
Cash to be brought in by 'A' (i - iv)
(vii) Cash to be paid to 'C' (ii - v)
= 80,000 90,000 = (10,000)

= 40,000 30,000 = 10,000
ACCOUNTANCY
156
(II)
Journal entries
Books of A, B and C
Journal
Date
Particulars
L.F.
Cash a/c
A's capital a/c
(For cash brought by A)
Dr.
C's capital a/c

Cash a/c
(For surplus capital withdrawn by C)
Dr.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
10,000
10,000
10,000
10,000
Sometimes the continuing partners may decide about the amount of total
capital of the reconstituted firm. For example on the retirement of Y, the
continuing partners X and Z decided that the capital of the new firm will be
Rs.1,50,000 and it will be in the new profit sharing ratio which will be 3 : 2.
After all adjustments on the retirement of Y the balances in the capitals of X
and Y were Rs. 85,000 and Rs. 60,000.
Now the new capital of X
= Rs. 1,50,000
3
=
5
Rs. 90,000
The new capital of Y
=Rs. 1,50,000
2
=
5
Rs. 60,000
Since existing capital of X is Rs. 85,000 after all adjustments and new
capital is Rs. 90,000, he will be required to bring Rs. 5,000 (i.e. Rs.90,000
Rs. 85,000). Z is not required to bring/withdraw any amount of capital since
his old capital is equal to that of his new capital in the new firm.
At times it may be decided that the amount payable to retiring partner will
be contributed by the continuing partners in such a way that their capitals
become proportionate to their new profit sharing ratio. First of all in such a
situation the total of the balances standing to the credit of the existing partner's
capital accounts (after adjustment on retirement)is computed. To this, the
amount payable to the retiring partner (which is to be brought by continuing
partners) is added to arrive at the total capital of the new firm. This total
capital is now divided in the new profit sharing ratio of the continuing partners
to ascertain their respective share of new capital. Now the amounts to be brought
157
in or withdrawn by the partners will be ascertained by comparing their new

capitals with balances in their capital accounts after all adjustments.
Illustration 11 (Capital Adjustment)
P, Q and R are partners sharing profits in ratio of 40%, 30% and 30%
respectively. After all adjustments, on P's retirement with respect to general
reserve, goodwill and revaluation the balances in their capital accounts stood
at Rs. 70,000, Rs. 60,000 and Rs. 50,000. It was decided that amount payable
to P will be brought in by Q & R in such a way so as to make their capitals in
proportionate to their profit sharing ratio. Calculate the amount to be brought
in by Q and R and record necessary journal entries for the same. Also record
necessary entry for payment to P.
Solution
(I) Calculation of new capital
Rs.
(i)
Balance in Q's capital account
(ii)
Balance in R's capital account
60,000
50,000
(iii) Amount payable to P
70,000
(iv)
Total capital of new firm
(i + ii + iii)
(v)
Q's new capital
= 1,80,000
1
= 90,000
2
(vi)
R's new capital
= 1,80,000
1
= 90,000
2
(vii) Amount to be brought by Q (i + v)
1,80,000
= 60,000 90,000
= (30,000)
(viii) Amount to be brought by R (ii + vi)
= 50,000 90,000
= (40,000)
ACCOUNTANCY
158
(II) Journal entries

Books of P, Q and R
Journal
Date
Particulars
L.F.
Cash a/c
Q's capital a/c
R's capital a/c
(Amount brought in by Q and R)
Dr.
P's capital a/c

Cash a/c
(Amount paid to P in full settlement)
Dr.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
70,000
30,000
40,000
70,000
70,000
4.2 Joint Life Policy

For the purpose of ensuring liquidity in the firm to settle the claim of the retiring/
deceased partner an assurance policy is taken up by the partners on their lives
collectively. The insurance company agrees to pay the sum assured (i.e., the
amount for which the policy has been taken) to the firm on the maturity date.
Maturity date is the date of death of any of the partners or the date on which the
term of the policy expires, whichever is earlier. The firm in turn agrees to pay to
the insurance company the amount of premium periodically. The amount of
premium payable will be same in each of the years.
Surrender Value (SV) is the amount payable by an insurance company on
the surrender/discontinuation of joint life policy before the date of maturity.
However, the surrender value keeps on increasing with the successive payment
of premium.
4.2.1 Accounting treatment for joint life policy
Joint Life Policy transactions by the firm can be dealt with any of the following
ways :
1.
Treated as an expense of firm
It implies that premium paid is treated as a business expense, it is chargeable

to the profit and loss account, thus reducing the distributable profits of the
159
partners. Year after year, the expense on account of premium on joint life
policy in recorded as an expense. In the event of death of a partner firm will
realise the sum assured and bonus, if any which will be distributed among the
partners. Consequently it obviates the need to exhibit insurance policy in the
Balance Sheet.
Following are the entries to record these transaction in the first and
subsequent years :
Year of obtaining and continuance of policy
l
For payment of premium:

Joint life policy premium
Bank a/c
Dr.
For transfer of premium paid to profit and loss account at the end of the year :
Profit and loss a/c
Joint life policy premium
Dr.
On the maturity of the policy

If the death takes place before the due date of the premium, the premium will
not be paid in the year of death. This would imply that entry for payment of
premium would not be recorded. On maturity, the insurance policy will be
surrendered to register the claim with the insurance company and sum assured
will be collected.
For this following entries are to be recorded :
(i)
On the death of partner, for making claim with the insurance company
Insurance Company/Insurance claim receivable a/c
Joint Life Policy
(ii)
Dr.
For Claim duly received from Insurance Co. on the date of receipt
Bank a/c
Insurance Co./Insurance claim receivable a/c
Dr.
(iii) Claim due will be distributed among existing partners (including outgoing)
Joint life policy
Dr.
All partner's capital a/c (individually)
2.
When premium paid is treated as an asset at an amount equal to the

surrender value of joint life policy.
ACCOUNTANCY
160
Here, joint life policy is shown at its surrender value in the Balance Sheet
of that date. Following accounting entries are to be recorded in this case :
(i)
First Year : On the date when policy is taken and premium is paid.
Joint Life Policy
Bank a/c
(ii)
Dr.
At the end of first year, the joint life policy account will show the balance which
is equal to its surrender value. The difference between the premium paid and
surrender value will be transferred to profit and loss account.
Profit and loss a/c
Joint Life Policy
Dr.
(Amount = surrender value in the previous year + premium paid during the current
year surrender value in the current year).
Second year and onwards, the entries (i) and (ii) shall be repeated until the last
year.
In the last year, i.e., the year of death, entry no. (i) will be recorded only if death
takes place after the due date of premium and entry no. (ii) will not be recorded
at all.
(iii) On maturity of policy or in the event of death, entry for making the insurance
claim will be :
Insurance company a/c
Joint Life Policy
(iv)
On the date of receipt when insurance company pays the insurance claim due :
Bank a/c
Insurance Company
(v)
Dr.
Dr.
Balance standing in Joint Life Policy account is distributed among all partners in
profit sharing ratio. Balance in Joint Life Policy account = [Total claim due
(Surrender value of the policy in the previous year + premium paid during the
current year).
4.2.2 Individual Life Policies

The firm may decide to take the insurance policy separately for each of the
partners on their lives. For such insurance policies, if premium is paid by the
firm, being a transaction of business, it becomes an asset of the firm. Whenever
death of any partner occurs, policy matures, the firm make a claim to the
insurance company and claim so received is distributed among all the partners
in the profit sharing ratio. The heir of deceased partner will be entitled to the
proportionate share in the policy of deceased. Further, surrender values of the
policies of other partners will be distributed among all the partners(including
161
heir of deseased) in their profit sharing ratio. The Joint Life Policy will be
shown in the Balance Sheet at its surrender value.
Illustration 12 (Joint Life Policy)
Pawan, Quber and Ramesh are partners in the ratio of 5:3:2. Pawan died on
14th Aug. 2002. The firm had taken insurance policies on the lives of the
partners, premium being charged to profit and loss account every year.
The Policy amount and surrender value (on 14.08.2002)
Particulars
Policy Amount
Rs.
Surrender Value
Rs.
60,000
90,000
60,000
25,000
35,000
15,000
Life Insurance Policies :

Pawan
Quber
Ramesh
Work out the amount payable to Pawan's legal representatives regarding

insurance policies. Record necessary journal entries.
Solution
Books of Pawan, Quber and Ramesh
Journal
Date
Particulars
L.F.
2002
Aug.14
Aug 14
Aug.14
Aug.14
Insurance Company a/c

Life Policy
(Claim for policy registered)
Dr.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
60,000
60,000
Bank a/c
Dr.
(Policy amount received on Pawan's death)
60,000
Life Policy
Pawan's Capital a/c
Quber's Capital a/c
Ramesh's Capital a/c
(Amount of Life policy transferred to
capital accounts)
Dr.
60,000
Quber's Capital a/c

Ramesh's Capital a/c
Pawan's Capital a/c
(Pawan's share credited to him in the
gaining ratio, i.e. 3 : 2)
Dr.
Dr.
60,000
30,000
18,000
12,000
15,000
10,000
25,000
ACCOUNTANCY
162

1.
Surrender value of policies of Quber and Ramesh = Rs. 35,000 + Rs. 15,000 = Rs. 50,000
2.
Pawan's share = Rs. 50,000
5
= Rs. 25,000
10

Jatin, Gagan and Kiran are equal partners have taken a Joint Life Policy of
Rs. 60,000 on June 30, 1999 paying annual premium of Rs. 6,000. Surrender
values for : 1999- NIL ; 2000 - Rs. 3,000; 2001 - Rs. 6,000 ; 2002 - Rs. 10,000:
Gagan die on July 3, 2002 ;
Record necessary entries for the year 2002
(i)
If premium paid is transferred to profit and loss account every year
(ii) If premium paid is treated as an asset. Also prepare Joint Life Policy
account for 2002.
Solution (i)
Books of Jatin, Gagan and Kiran
Journal
Date
Particulars
L.F.
2002
Jun.30
Jul. 3
Jul. 3
Dec. 31
Joint Life Policy premium

Bank a/c
(Premium paid on due date)
Dr.
Insurance company a/c

Joint life policy
(On death, policy claim registered
with insurance company)
Dr.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
6,000
6,000
60,000
60,000
Joint Life Policy

Dr.
Jatin's capital a/c
Gagan's capital a/c
Kiran's capital a/c
(Policy claim received credited to partner in
their profit sharing ratio)
60,000
Profit and loss a/c

Dr.
Joint Life Policy premium
(Premium paid transferred to profit and loss
account)
6,000
20,000
20,000
20,000
6,000
Note : It is assumed that the claim registered with insurance company will be received in
due course of time.
163
(ii)
Books of Jatin, Gagan and Kiran
Journal
Date
2002
Particulars
Jun.30
July 3
July 3
L.F.
Joint Life Policy

Bank a/c
(Premium paid on due date)
Dr.

Joint Life Policy
(On death, policy claim registered
with insurance company)
Dr.
Joint Life Policy

Jatin's capital a/c
Gagan's capital a/c
Kiran's capital a/c
(Balance in joint life policy account
distributed to partners, i.e. 60,000
(6,000+6,000) in profit sharing ratio)
Dr.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
6,000
6,000
60,000
60,000
48,000
16,000
16,000
16,000
Joint Life Policy Account

Dr.
Date
2003
Cr.
Particulars
J.F. Amount Date

(Rs.) 2003
Jan. 1 Balance b/f

July 3 Bank
Jatin's capital
Gagan's capital
Kiran's capital
Total
Particulars
J.F.
Amount
(Rs.)
6,000* July 3 Insurance Co.

6,000
16,000
16,000
16,000
60,000
60,000
60,000
Total
* This amount is the balance of Joint Life policy account on the date of death , which is the
surrender value of Joint Life Policy of previous year to the death, i.e. year 2001.

Nita and Rita are partners in a business sharing profits in the ratio of 7:3. The
firm has taken a joint life insurance policy on the lives of partners for a sum of
Rs.1,00,000 with effect from 30-06-99. The annual premium is Rs. 10,000.
ACCOUNTANCY
164
On Jan 2, 2002, Nita died and amount of Rs. 1,20,000 (including bonus)
was received from the Life Insurance Company. The firm has charged the
premium to Profit and Loss Account each year on financial year basis. You are
required to make necessary journal entries assuming that the amount was
received on Feb.1, 2002.
Solution
Books of Nita and Rita
Journal
Date
1999
Jun.30
2000
Mar. 31
2000
Jun 30
2001
Jun 30
2001
Jun. 30
2001
Jan. 2
2002
Jan. 2
Particulars
L.F.
Debit
Amount
(Rs.)
Joint Life Policy Premium a/c

Dr.
Bank a/c
(Payment of premium on joint life policy)
10,000
Profit and Loss a/c

Dr.
Joint Life Policy Premium
a/c
(Premium charged to Profit and Loss a/c )
10,000

Dr.
Bank a/c
(Payment of premium on joint life policy)
10,000
Profit and Loss a/c

Dr.
10,000

Dr.
Bank a/c
(Payment of premium on joint life policy )
10,000
Life Insurance Company

Joint Life Policy a/c
(Maturity of claim on account of joint
life policy)
Dr.

Dr.
Nita's Capital a/c
Rita's Capital a/c
(Joint life policy a/c transferred to partners
capital a/c )
Credit
Amount
(Rs.)
10,000
10,000
10,000
10,000
10,000
1,20,000
1,20,000
1,20,000
84,000
36,000
2002
Feb. 2
2002
Mar. 31
165
Bank a/c
Dr.
Life Insurance Company
(Amount received against the policy on
Nita's death)
120,000
Profit and Loss a/c

Dr.
10.000
120,000
10,000

Madhu and Shyam who shared profits in the ratio of 3:2 took out a Joint Life
Policy on May 14, 1999 for Rs. 60,000. The annual premium was Rs. 8,500.
The surrender value of the policy was :
1999 - NIL ; 2000 - Rs.4,500 ; 2001- Rs.8,000; and 2002 - Rs. 12,000.
Madhu died on Nov 14, 2002 and the amount of the policy was received
on Dec.1, 2002. The books are closed on December 31 each year.
Give journal entries assuming that the firm treats premium paid as asset
and maintains a Joint Life Policy Account at its surrender value. Also prepare
Joint Life Policy account.
Solution
Books of Madhu and Shyam
Journal
Date
1999
May 14
Dec.31
2000
May 14
Particulars
Joint Life Policy

Bank a/c
(Premium paid on joint life policy)
L.F.
Dr.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
8,500
8,500
Profit and Loss a/c

Dr.
Joint Life Policy Premium
( Joint Life Policy a/c written off to bring it
down to surrender value )
8,500
Joint Life Policy

Bank a/c
(Premium paid on joint life policy)
8,500
Dr.
8,500
8,500
ACCOUNTANCY
166
Dec.31
2001
May14
Dec.31
2002
May14
Nov. 14
Dec. 1
Dec. 31
Profit & Loss a/c

Dr.
Joint Life Policy
(Joint Life Policy A/c written off to bring it
4,000
Joint Life Policy

Bank a/c
(Payment of premium paid on joint life
policy )
8,500
4,000
Dr.
8,500
Profit and loss Account

Dr.
Joint Life Policy
(Joint life policy a/c written off to bring it
5,000

Bank a/c
(Premium paid on joint life policy )
8,500
5,000
Dr.
8,500

Dr.
Joint Life Policy
(Insurance claim on account of joint life
policy on death of Madhu registered with
insurance company)
60,000
Bank a/c
Insurance Company's a/c
(Receipt of amount of policy on
Mahdu's death)
60,000
60,000
Dr.
60,000

Dr.
Madhu's Capital Account
Shyam's Capital Account
(Balance in Joint Life Policy transferred to
capital accounts of partners in the ratio of 3:2 )
43,500
26,100
17,400

Dr.
Date
Cr.
Particulars
1999
May14 Bank
J.F.
Amount
(Rs.)
Date
Particulars
1999
8,500 Dec.31 Profit and Loss
Bal c/f
2000
Jan 1 Balance b/f
May 14 Bank
J.F.
Amount
(Rs.)
8,500
NIL
2000
Nil Dec.31 Profit and loss
8,500
Bal. c/f
4,000
4,500
8,500
8,500
2001
May14 Bal. b/f
Bank.
167
2001
4,500 Dec.31 Profit and loss
8,500 Dec.31 Bal. c/f
5,000
8,000
13,000
2002
Jan1
Bal b/f
Bank
May14 Madhu's
capital
Nov.14 Shyam's
capital
13,000
2002
8,000 Nov.14 Insurance Company
8,500
60,000
26,100
17,400
43,500
Total
60,000
Total
60,000

Mahesh and Raj sharing profit in the ratio of 2:3, took out a joint life policy on
July1, 1999 of Rs. 80,000 for paying annual premium of Rs. 8,000. The
surrender values were 1999-NIL ; 2000-Rs.4,200; 2001-Rs. 7,500;2002Rs. 12,000. Raj died on March 18, 2002 and claim was received. Books are
closed on calender year basis. Prepare Joint Life Policy Account,
Solution
Dr.
Date
Cr.
Particulars
J.F.
Amount
(Rs.)
Date
Particulars
J.F.
Amount
(Rs.)
1999
Jul.1 Bank
1999
8,000 Dec.31 Profit and Loss
8,000
2000
Jul. 1 Bank
2000
8,000 Dec.31 Profit and loss
Balance c/f
3,800
4,200
8,000
8,000
2001
Jan.1 Balance b/f
Jul.1 Bank
2002
Jan1 Balance b/f
Mar.8 M's
29,000
capital
Mar.8 R's
43,500
capital
Total
4,200
8,000
12,200
2001
Dec.31 Profit and loss
Dec.31 Balance c/f
2002
7,500 Mar.18 Insurance Company
4,500
7,500
12,200
80,000
72,500
80,000
Total
80,000
ACCOUNTANCY
168
Illustration 17 (Retirement of partner)

Sita, Gita and Rita are partners sharing profits in the ratio of 2:2:1. Their
Balance Sheet as at March 31, 2002 as under :
Liabilities
Amount
(Rs.)
Assets
Sundry Creditors
Reserves
Capital : Sita
80,000
Gita
62,500
Rita
75,000
Employee's Provident Fund
49,000
14,500
2,17,500
4,000
Cash
Debtors
Stock
Machinery
Building
Patents
8,000
19,000
42,000
85,000
1,22,000
9,000
2,85,000
Total
2,85,000
Total
Amount
(Rs.)
As Gita got a very good break at MNC so she decided to retire on that date and
it was decided that Sita and Rita would share the profit in the ratio of 5:3. Goodwill
was valued at Rs. 70,000, machinery at Rs. 78,000, Building at Rs. 1,52,000,
stock at Rs. 30,000 and bad debts amounting to Rs. 1,550 be written off. Record
journal entries in the books of the firm and balance sheet of new firm.
Solution
Journal
Date
Particulars
L.F.
2002
Jan.1
Debit
Amount
(Rs.)
Revaluation a/c
Dr.
Machinery a/c
Stock a/c
Debtors a/c
(Loss on revaluation of assets recorded)
20,550
Building a/c
Revaluation a/c
(Appreciation in value of building)
30,000
Dr.
Revaluation a/c
Dr.
Sita's Capital a/c
Gita's Capital a/c
Rita's Capital a/c
(Profit on revaluation transferred to
partners' capital accounts in the ratio of 2:2:1)
Credit
Amount
(Rs.)
7,000
12,000
1,550
30,000
9,450
3,780
3,780
1,890
169
Reserve
Sita's Capital a/c
Gita's Capital a/c
Rita's Capital a/c
(Reserve transferred to partners)
Dr.
14,500
5,800
5,800
2,900
Sita's Capital a/c

Dr.
Rita's Capital a/c
Dr.
Gita's Capital
(Gita's share of goodwill given to her in
gaining ratio)
Gita's Capital a/c
Gita's Loan a/c
(Amount payable to retiring partner
transferred to his loan account)
Dr.
15,750
12,250
28,000
1,00,080
1,00,080
Balance Sheet as at March 31, 2002

Liabilities
Amount
(Rs.)
Assets
Sundry Creditors
Capitals
Sita
73,830
Rita
67,540
Gita's Loan
Employee's Provident Fund
49,000
Cash
Debtors
Stock
Machinery
Building
Patents
Total
1,41,370
1,00,080
4,000
2,94,450
Total

Calculation of gaining ratio :
Sita =
5
2
9
=
8
5
40
Rita =
2
8
1
7
=
5
40
Therefore, gaining ratio of Sita and Rita will be 9 : 7.
Amount
(Rs.)
8,000
17,450
30,000
78,000
1,52,000
9,000
2,94,450
ACCOUNTANCY
170
Revaluation Account
Dr.
Cr.
Date
Particulars
J.F.
Machinery
Stock
Debtors
Profit:
Sita
3,780
Gita
3,780
Rita
1,890
Total
Amount
(Rs.)
Date
7,000
12,000
1,550
Particulars
J.F.
Building
Amount
(Rs.)
30,000
9,450
30,000
Total
30,000
Partner's Capital Accounts

Dr.
Cr.
Date Particulars
J.
F.
Sita
Rs.
Gita
Rs.
Rita Date
Rs.
Gita's Capital
Gita's Loan
Balance c/f
15,750
12,250
Total
89,580 1 ,0 0 ,0 8 0 79,790
1,00,080
73,830
67,540
Particulars
J.
F.
Sita
Rs.
Gita
Rs.
Rita
Rs.
Balance b/f
Revaluation
Reserve
Sita's Capital
Rita's Capital
80,000
3,780
5,800
62,500 75,000
3,780 1,890
5,800 2,900
15,750
12,250
Total
89,580 1,00,080 79,790

K, L and M were carrying on partnership business sharing profits in the ratio
of 5:3:2 respectively. On March 31, 2002, the Balance Sheet of the firm stood
as follows :
Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
Creditors
Capitals :
K
L
M
35,000
Bank
Debtors
14,000
Less Provision
2,000
Stock
Building
Profit and Loss Account
22,000
Total
38,000
35,000
30,000
1,03,000
1,38,000
Total
12,000
27,400
73,000
3,600
1,38,000
171
L retired due to his transfer on the above date on the following terms :
(i) Buildings to be depreciated by Rs. 23,000.
(ii) New ratio of K and M will be 2:1.
(iii) Provision for doubtful debts to be made 20% on Debtors.
(iv) Salary outstanding Rs. 4,650 is to be recorded, and creditors of
6,000 will not be claimed.
(v)
Rs.
Goodwill of the firm is valued at Rs. 72,000.
(vi) L will be paid Rs. 12,000 through bank and balance in L's capital account
is to be transferred to his loan account.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance
Sheet after L's retirement.
Solution
Revaluation Account
Dr.
Cr.
Date
Particulars
J.F.
Amount
(Rs.)
Building
Provision for
Doubtful Debts
Salary
outstanding
23,000
800
Total
28,450
Date
4,650
Particulars
J.F.
Amount
(Rs.)
Creditors
Loss:
K
11,225
L
6,735
M
4,490
6,000
22,450
Total
28,450
Partner's Capital Account

Dr.
Date
2003
Cr.
Particulars
J.F.
K
Rs.
L
Rs.
M
Rs.
Date
Particulars
J.F.
K
Rs.
L
Rs.
M
Rs.
Revaluation
P and L
L's Capital
L's Loan
Bank
Balance c/f
11,225 6,735
1,800 1,080
12,000
--- 36,785
-- 12,000
12,975
--
4,490
720
9,600
--15,190
Balance b/f
K's Capital
M's Capital
38,000
35,000 30,000
12,000
9,600
Total
38,000 56,600
30,000
Total
38,000 56,600 30,000
ACCOUNTANCY
172
Balance Sheet of K and M

(After Retirement)
Liabilities
Amount
(Rs.)
Creditors
Salary Outstanding
Capital:
K
12,975
M
15,190
L's Loan
Total
Assets
29,000
4,650
Amount
(Rs.)
Debtors
Less: Provision
Stock
Building
Bank
28,165
36,785
98,600
14,000
2,800
Total
11,200
27,400
50,000
10,000
98,600

(a)
Gaining Ratio
New share old share

K=
2
5
5
=
3
10
30
M=
1
3
L's share of goodwill (Rs.) = 72,000
2
4
=
10
30
3
= 21,600
10
(b)
Bank Account
Dr.
Date
Cr.
Particulars
J.F.
Amount
(Rs.)
Date
Particulars
J.F.
Amount
(Rs.)
Balance b/f
22,000
L's Capital
Balance c/f
12,000
10,000
Total
22,000
Total
22,000
Illustration 19 (Retirement of the partner)

M, N and O are partners sharing profits in the ratio of 3:2:1. N retired from the
firm due to his illness. On that date the Balance Sheet of the firm was as follows :
173
Balance Sheet of K, M and O as at March 31, 2002

Liabilities
Amount
(Rs.)
Workmen's Compensation
Fund
Sundry Creditors
Bills Payable
Outstanding salary
Provision for legal damages
Capital:
M
46,000
N
30,000
O
20,000
Total
Assets
12,000
Amount
(Rs.)
Bank
Debtors
Less: Provision for
doubtful debts
Stock
Furniture
Premises
15,000
12,000
2,200
6,000
7,600
6,000
400
5,600
9,000
41,000
80,000
96,000
1,43,200
Total
1,43,200
The following is additional information :

(i)
Premises have appreciated by 20%. Stock depreciated by 10% and

Provision for doubtful debts was to be made 5% on debtors. Provision
for legal damages is to be made at Rs. 7,200 and furniture to be
brought upto Rs. 45,000.
(ii) Goodwill of the firm to be valued at Rs. 42,000.

(iii) Rs. 26,000 from N's capital account to be transferred to his loan
account and balance to be paid through bank, and loan be obtained
from bank for the purpose.
(iv) New profit sharing ratio of M and O is decided to be 5:1. Give the
necessary ledger accounts and the Balance Sheet of the firm after N's
retirement.
Solution
Revaluation Account
Dr.
Date
Cr.
Particulars
J.F.
Amount
(Rs.)
Stock
Provision for
legal damages
M's Capital 9,000
N's Capital 6,000
O's Capital 3,000
900
18,000
Total
20,100
1,200
Date
Particulars
J.F.
Amount
(Rs.)
Premises
Debtors
Furniture
16,000
100
4,000
Total
20,100
ACCOUNTANCY
174

Dr.
Cr.
Date
Particulars
J.F.
N's Capital
N's Loan
Bank
Balance c/f
M
Rs.
N
Rs.
O
Rs.
-26,000
28,000
--
---25,000
61,000 54,000
25,000
14,000
--47,000
Total
Date
Particulars
J.F.
Balance b/f
Revaluation
M's Capital
Workmen's
Comp. Fund
Total
M
Rs.
N
Rs.
46,000
9,000
-6,000
O
Rs.
30,000 20,000
6,000 3,000
14,000
-4,000 2,000
61,000 54,000 25,000
Notes for the Solution

1.
Gaining Ratio :
M=
5
6
O=
1
1
=0
6
6
3
2
=
6
6
It is to be noted that only M has acquired the share.

N's share of goodwill of Rs. 14,000 (42,000 2/6) is to be borne by M only, O is
not gaining anything.
Bank Account
Dr.
Date
Cr.
Particulars
J.F.
Amount
(Rs.)
Date
Particulars
Balance b/f
Bank Loan
7,600
28,000
N's Capital
Balance c/f
Total
35,600
Total
J.F.
Amount
(Rs.)
28,000
7,600
35,600
Note : Workmen's Compensation Fund is surplus on retirement as there is no liabilities

against this, hence distributed.
175

(After N's retirement)
Liabilities
Amount
(Rs.)
Assets
Sundry Creditors
Bills Payable
Outstanding Salary
Provision for legal damages
N's loan
Bank Loan
Capital Account :
M
47,000
O
25,000
15,000
12,000
2,200
7,200
26,000
28,000
Bank
Debtors
Less : Provision for
doubtful debts
Stock
Furniture
Premises
Total
Amount
(Rs.)
7,600
6,000
300
5,700
8,100
45,000
96,000
72,000
1,62,400
Total
1,62,400

L, M and N were partners sharing profits as 50% , 30% and 20% respectively.
On March 31, 1998, their Balance Sheet stood as follows :
Balance of L, M and N as at March 31, 1998
Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
Creditors
Profit and Loss A/c
Investment Fluctuation
Fund (IIF)
General Reserve
Capitals :
L
50,000
M
40,000
N
20,000
21,000
15,000
10,000
Premises
Motor Vans
Investment
Plant
Stock
Debtors
Less : provision
Cash
62,000
20,000
19,000
12,000
15,000
Total
25,000
40,000
3,000
37,000
16,000
1,10,000
1,81,000
Total
1,81,000
On this date M retires and L and N agreed to continue on the following

terms :
1.
Firm's goodwill was valued at Rs. 51,000 and it was decided to adjust
M's goodwill into capital accounts of continuing partners.
2.
There is a claim for workmen's compensation to the extent of

Rs. 4,000. Investments are brought down to Rs. 15,000.
ACCOUNTANCY
176
3.
Provision for bad debts is to be reduced by Rs. 1,000.
4.
M will be paid Rs. 8,200 in cash and balance will be transferred to his
Loan Account which will be paid in 3 equal instalments together with
interest @ 10% p.a.
5.
L's and N's capital will be adjusted in their new profit sharing ratio i.e.
3 : 2 through cash accounts, prepare Capital Accounts and Balance
Sheet. Also prepare M's Loan Account.
Solution
Dr.
Date
Cr.
Particulars
J.F.
L
Rs.
M
Rs.
N
Rs.
Date
Particulars
J.
F.
L
Rs.
M
Rs.
40,000
4,500
7,500
5,100
10,200
-1,800
N
Rs.
Revaluation
M's capital
Cash
M's Loan
Cash
Balance c/f
1,500
900
5,100
--- 8,200
-- 60,000
15,520
-50,880
--
600
10,200
---33,920
Balance b/f
Profit and Loss
General Reserve
L's Capital
N's Capital
Workmen Compensetion Fund
Cash
50,000
7,500
12,500
---3,000
20,000
3,000
5,000
---1,200
15,520
Total
73,000 69,100
44,720
Total
73,000 69,100 44,720
Balance Sheet of L and N as at March 31, 1998
Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
Creditor
Liability for Workmen's
Compansetion
M's Loan
Capitals :
L
50,880
N
33,920
21,000
4,000
Business Premises
Motor Vans
Investments
Plant
Stock
Debtors
Less : Provision
for bad debts
Cash
62,000
20,000
15,000
12,000
15,000
Total
60,000
84,800
1,69,800
Total
40,000
2000
38,000
7,800
1,69,800
177
M's Loan Account

Dr.
Cr.
Date
Particulars
J.F.
1999
Dec.31 Cash
(20,000+6,000)
Dec.1
Amount
(Rs.)
26,000
Balanced c/f
2000
Dec.31 Cash
(20,000+4,000)
Date
1999
Jan.1
Particulars
J.F.
Amount
(Rs.)
M's Capital
60,000
40,000 Dec.31 Interest

66,000
2000
24000 Jan.1 Balance b/f
Dec.31 Interest
6,000
66,000
40,000
4,000
Dec.31 Balance c/f
20,000
44,000
44,000
2001
Dec.31 Cash A/c
(20,000 +2,000)
2001
22,000 Jan.1 Balance b/f
Dec.31 Interest
20,000
2,000
22,000
22,000
Total
Total

Journal entry :
Investment Fluctuating Fund a/c
Dr.
Investment a/c
(Decrease in Investment has to be met out of
Investment Fluctuating Fund)
(a)
Calculation of Gaining Ratio :

L=
3
5
1
=
5
10
10
N=
2
5
1
2
=
10
10
Hence gaining ratio = 1 : 2

(b)
Adjustment of L's and N's Capital :

Total capital of the firm after retirement of
M = Rs. 66,400 + Rs. 18,400 = Rs. 84,800
Rs. 4,000
Rs. 4,000
ACCOUNTANCY
178
Capital in new profit sharing ratio :

L = 84,800
3
= Rs. 50,880
5
N = 84,800
2
= Rs. 33,920
5
Revaluation Account
Dr.
Date
Cr.
Particulars
J.F.
Liability for
Workmen
Compensation
Amount
(Rs.)
Date
4,000
Total
4,000
Particulars
J.F.
Amount
(Rs.)
Provision for bad

debts
Loss :
L
1,500
M
900
N
600
1,000
3,000
Total
4,000
Cash Account
Dr.
Date
Cr.
Particulars
J.F.
Amount
(Rs.)
Date
Particulars
J.F.
Amount
(Rs.)
Balance b/f
N's Capital
16,000
15,520
M's Capital
L's Capital
Balance c/f
8,200
15,520
7,800
Total
31,520
Total
31,520
Retiring partner is to be paid through cash brought in by continuing

partners in such a way so as to make their capitals proportionate to their new
profit sharing ratio.
Illustration 21 (Retirement of Partner)
Fish, Goat and Hen are partners sharing profits in the ratio of 5:3:2 respectively.
Balance Sheet on March 31, 2003 was as follows :
179
Balance of Fish, Goat and Hen as at March 31, 2003

Liabilities
Amount
(Rs.)
Sundry Creditors
Bills Payable
Profit and Loss
Capital Accounts :
Fish
65,000
Goat
50,000
Hen
40,000
Total
22,000
8,000
15,000
Assets
Amount
(Rs.)
Fixed Assets
Stock
Debtors
Cash
1,00,000
45,000
45,000
10,000
Total
2,00,000
1,55,000
2,00,000
Fish retires on March 31, 2003 and for this purpose

Goodwill was valued at
Rs. 25,000
Fixed Assets were valued at
Rs. 1,25,000
Stock was considered worth
Rs. 40,000
Fish is to be paid in cash brought in by Goat and Hen in such a way so as
to make their capitals proportionate to their new profit sharing ratio, which is
3: 2 respectively. Minimum Cash Balance is to be maintained at Rs. 7,000.
Prepare Capital Accounts and the Balance Sheet of Goat and Hen.
Solution
Dr.
Date
Cr.
Particulars
J.F.
Fish
Rs.
Goat
Rs.
Hen
Rs.
Date
Particulars
J.F.
Fish
Rs.
Goat
Rs.
Hen
Rs.
Cash
Fish
Balance c/f
95,000
--4,500 3,000
-- 1,12,200 74,800
Balance b/f
Revaluation
Reserve
Goat
Hen
Cash
65,000
10,000
7,500
7,500
5,000
50,000 40,000
6,000
4,000
4,500
3,000
Total
95,000 1,16,700 77,800
Total
95,000 1,16,700 77,800
56,200 30,800
Balance Sheet as at December 31,2002

Liabilities
Goat's Capital
Hen's Capital
Sundry Creditors
Bills Payable
Total
Amount
(Rs.)
Assets
Amount
(Rs.)
1,12,200
74,800
22,000
8,000
Fixed Assets
Stock
Debtors
Bank
1,25,000
40,000
45,000
7,000
2,17,000
Total
2,17,000
ACCOUNTANCY
180

A)
B)
Gaining Ratio :
Goat's gain
3
5
3
10
3
10
Hen's gain
2
5
2
10
2
10
Calculation of total capital of the firm after Fish's retirement :

(a)
Balance of Capital of the firm after Fish's retirement

(i)
Goat's Capital
=
Rs. 56,000
(ii) Hen's Capital
=
Rs. 44,000
Combined Capital
=
Rs. 1,00,000
(b)
Shortage of cash to be brought in by Goat and Hen in order to make payment

of Fish Rs. 95,000 Rs.3,000
= Rs. 92,000
Total Capital of New Firm (a+b) = Rs. 1,92,000

(2)
Calculation of actual cash to be paid off or brought in by Goat and Hen

Hen
Goat
(a)
(b)
(c)
New Capital
(Rs. 1,87,000 in the ratio of 3 : 2 )
Existing Capital
Cash to be brought in (ab)
Rs. 1,12,200
Rs. 56,000
Rs. 56,200
Rs. 74,800
Rs. 44,000
Rs. 30,800
Revaluation Account
Dr.
Date
Cr.
Particulars
J.F.
Amount
(Rs.)
Stock
Profit transferred
to :
Fish
10,000
Goat
6,000
Hen
4,000
5,000
20,000
Total
25,000
Date
Particulars
Fixed Assets
Total
J.F.
Amount
(Rs.)
25,000
25,000
181
Cash Account
Dr.
Cr.
Date
Particulars
Balance b/f
Goat's Capital
Hen's
Total
J.F.
Amount
(Rs.)
10,000
56,200
30,800
97,000
Date
Particulars
J.F.
Fish's Capital
Balance c/f
Amount
(Rs.)
90,000
7,000
Total
97,000

A, B and C are in partnership sharing profits in the ratio of 5 : 3 : 2 .The Balance Sheet
of the firm as on April 1, 2002 was as follows :
Balance Sheet of A, B and C as at April 1, 2002
Liabilities
Capital Accounts :
A
40,000
B
61,000
C
24,000
Reserve
Sundry Creditors
Profit and Loss a/c
Bills Payable
Amount
(Rs.)
1,25,000
30,000
50,000
28,000
5,000
Assets
Bills Receivable
Machinery
Furniture
Sundry Debtors
Less : Provision for
Doubtful debts
Stock
Cash at Bank
2,38,000
Amount
(Rs.)
15,000
82,000
4,000
70,000
3,000
67,000
20,000
50,000
2,38,000
On April 1, 2002, B retire due to his foreign assignment and A and C

continued in partnership, sharing profits and losses in the ratio of 3 : 2 . It was
agreed that following adjustments were to be made on the retirement of B :
(a) The machinery was to be revalued at Rs. 85,000
(b) The stock was to be reduced by Rs. 1,000.
(c)
The furniture was to be reduced to Rs. 1,600.
(d) The provision for doubtful debts would be 6%.

(e)
A provision of Rs. 800 was to be made of outstanding expenses.
(f)
A liability on account of damages of Rs. 7,000 included in creditors is

settled at Rs. 12,000.
ACCOUNTANCY
182
The partnership agreement provides that in case of retirement of a partner

goodwill was to be valued at three year's purchase of average profits, which
are 10,000.
B was paid off in full. A and C were to deposit such an amount in bank so
as to make their capital in proportionate to the new profit sharing ratio, subject
to the condition that a bank balance of Rs. 40,000 was to be maintained as
working capital.
Record the necessary journal entries to give effect to the above
arrangements and prepare the partner's capital accounts as on April 1, 2002
and also the Balance Sheet after retirement .
Solution
Journal
Date
Particulars
L.F.
2002
April 1
"
"
"
Machinery a/c
Dr.
Revaluation a/c
(Appreciation in the value of machinery )
Revaluation a/c
Stock a/c
Furniture a/c
Debtors a/c
Provision for
Outstanding expenses a/c
Provision for damages a/c
(Reduction in the value of assets and
provision made )
Dr.
A's Capital a/c

B's Capital a/c
C's Capital a/c
Revaluation a/c
(Loss on revaluation )
Dr.
Dr.
Dr.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
3,000
3,000
10,400
1,000
2,400
1,200
800
5,000
3,700
2,220
1,480
7,400
Reserve a/c
Dr.
A's Capital a/c
B's Capital a/c
C's Capital a/c
(Distribution of reserve among partners )
30,000
A's a/c
Dr.
C's a/c
Dr.
B's a/c
(Adjustment of goodwill made in gaining
ratio 1:2)
3,000
6,000
15,000
9,000
6,000
9,000
183
Bank a/c
Dr.
A's Capital a/c
C's Capital a/c
(Amount brought by continuing partners to
pay to the retiring partners )
75,180
B's Capital a/c

Bank a/c
85,180
37,060
38,120
Dr.
85,180
(Payment made to retiring partner )

Dr.
Cr.
Date
2002
Particulars
April
B's Capital
Revaluation
Bank
Balance c/f
J.
F.
Total
A
Rs.
B
Rs.
3,000
3,700
-99,360
2,220
85,180
C Date
Rs. 2002
6,000 April
1,480
66,240
1,06,060 87,400
73,720
Particulars
J.
F.
Balance b/f
Profit and Loss
Reserve
A
C
Bank
Total
A
Rs.
B
Rs.
C
Rs.
40,000
14,000
15,000
61,000
8,400
9,000
3,000
6,000
24,000
5,600
6,000
37,060
38,120
1,06,060
87,400 73,720
Revaluation Account
Dr.
Date
2002
Cr.
Particulars
April Stock
Furniture
Provision
Doubtful debts
Provision for
Damages
Provision for
outstanding
expenses
Total
J.F.
Amount
(Rs.)
Date
2002
1,000
2,400
1,200
April
5,000
Particulars
J.F.
Amount
(Rs.)
Machinery
3,000
Loss distributed :
A
3,700
B
2,220
C
1,480
7,400
800
10,400
Total
10,400
ACCOUNTANCY
184
Balance Sheet of New Firm as at December 31, 2002

Liabilities
Amount
(Rs.)
Capital :
A
99,360
C
66,240
Provision for Outstanding
Expenses
Provision for damages
Sundry Creditors
Bills Payable
1,65,600
800
5,000
50,000
5,000
Total
2,26,400
Assets
Amount
(Rs.)
Bills Receivable
Machinery
Furniture
Sundry Debtors
Less : Provision
Stock
Cash at Bank
15,000
85,000
1,600
70,000
4,200
Total
65,800
19,000
40,000
2,26,400
Bank Account
Dr.
Cr.
Date
2002
Particulars
J.F.
Amount
(Rs.)
April 1 Balance b/f
Date
2002
50,000 April 1
37,060
38,120
A's Capital
B's Capital
Total
1,25,180
Particulars
B's Capital
Balance c/f
Total
J.F.
Amount
(Rs.)
85,180
40,000
1,25,180

1.
Goodwill
= Rs. 10,000 3
= Rs. 30,000
Rs. 30,000
3
= Rs. 9,000
10
2.
B's Share
3.
Gaining Ratio :
A=
3
5
C=
2
2
2
=
5
10
10
5
1
=
10
10
Cash be deposited into bank = B's Capital + Working capital required Cash at
Bank by A and C
= Rs.85,180 + Rs. 40,000 Rs. 50,000 = Rs. 75,180
4.
185
Total Capital of new firm = A's existing capital + C's existing capital
+ Cash to be brought in by them.
= (69,000 6,700) + (35,600 7,480) + (85,180 10,000)
= 62,300 + 28,120 + 75,180 = 1,65,600
A
5.
Proportionate Capital
Rs.1,65,600 3/5
Rs.1,65,600 2/5
= Rs. 99,360
= Rs. 66,240
4.3 Death of a Partner

Accounting treatment in the event of death of the partner is on the same lines as
that of the retirement of a partner except that :
1.
In case of death of a partner, his heirs or executors are entitled to all rights/
amounts due on his death, which he would have been entitled to.
2.
Since death may occur on any day, the heirs/executors would be entitled in
the share of profit or loss, interest on capital and drawings, if any, from the
date of last balance sheet to the date of death. Therefore, the executors of
the deceased partner will be entitled to interest on capital, profits or losses
in the year of death from the date of last balance sheet to the date of death
and liable to adjust for drawings and interest on drawings from the amount
due.
3.
If there is a joint life policy, it will mature at the sum assured. The heirs
would be entitled to share in joint life policy.
The problem of calculation of profits will arise only in case the partner dies
on the date other than balance sheet date. In that situation, the deceased
partner's share of profit may be calculated on any of the following basis :
(i)
A fresh trial balance and profit and loss account is to be prepared.
(ii) On the basis of immediately preceding year's profits. In this case it is

assumed that profits will accrue uniformly over the year.
Deceased partner's share of profit in the year of death shall be :
Preceding year's profit number of days intervening last balance
sheet and date of death proportion of profits of deceased partner
365
ACCOUNTANCY
186
(iii) Yet sales could another be basis for calculating the share of profit to
be given to the deceased partner from the date of last balance sheet to
the date of death. This method can be used only in case where the
rate of profit is agreed upon between the executors of deceased partner
and the other partners.
"Deceased partner's share of profit in the year of death shall be = Sales for the
intervening period proportion of profit of the deceased partner Rate of Profit."
It is to be noted that in case of death of a partner, the balance in deceased

partner's capital account will be transferred to his executor's account and
then the payment can be settled as agreed. The entry for transfer to executor's
account is as under :
Deceased Partner's Capital a/c
Deceased's Executor's a/c
Dr.
Illustration 23 (Death of Partner)

A, B and C are partners sharing in the ratio of 5:3:2. B dies on June 30, 2002
i.e. three months after closing of the books Profits for three years :
2000 : Rs. 25,000
2001 : Rs. 20,000
2002 : Rs. 15,000
Find out B's share of profit on the date of death if as per terms of the
agreement he was entitled to profit (i) on the basis of immediately preceding
year's profits to the date of death (ii) on the basis of average profit of the preceding
three years to the date of death.
Solution
(i)
B's Share of Profit
= 15,000
(ii)
B's share of Profits
3
3
10
12
= Rs. 1,125
3
(25,000 + 20,000 + 15,000) 3
3
10 12
= Rs. 1,500
187
Illustration 24 (Death of Partner)

X, Y and Z are partners sharing profit in the ratio of 2:2:1. X dies on July 1, 2002
whereas books of accounts are closed on March 31every year. Sales for the year
2001 amounts to Rs. 4,00,000 and that from April 1 to June 30, 2002 to
Rs.1,50,000. The profit for the year 2001 were calculated as Rs. 40,000 calculate
X's share of profits in the firm for 2002 on the basis of sales.
Solution
Rate of Profit
Profit
100
Sales
Profit of the firm for three months
Rs. 40,000
100 = 10 %
Rs. 4,00,000
= Rs. 1,50,000
10
= Rs. 15,000
100
(i.e., April 1 to June 30)

X's Share of profit = Rs. 15,000
2
= Rs. 6,000.
5
Illustration 25 (Death of partner)

Following is the Balance Sheet of the Pon, Kon and Bon as on March 31, 2003.
They shared profits in the ratio of their capital.
Liabilities
Sundry Creditors
Reserve
Capital Accounts :
Pon
24,000
Kon
12,000
Bon
8,000
Amount
(Rs.)
4,600
5,400
44,000
Assets
Amount
(Rs.)
Land & Bldg.

Plant & Machinery
Stock
Sundry Debtors
Cash at Bank
Cash in Hand
23,400
13,000
4,700
6,500
5,600
800
54,000
54,000
Pon died on June 30, 2003. Under the terms of partnership the executors
of a deceased partner were entitled to :
(a) Amount standing to the credit of the Partner's Capital Account.
(b) Interest on Capital at 12% per annum.
ACCOUNTANCY
188
(c)
Share of goodwill on the basis of four year's purchase of three year's

average profits.
(d) Share of Profit from the closing of the last financial year to the date of
death on the basis of the last year's profit. Profit for the years 2001,
2002 and 2003 were respectively Rs. 8,000, Rs. 12,000 and Rs. 7,000.
Record the necessary journal entries and draw up Pon's account to be
rendered to his executors and his executor's account, presuming that they are
paid by raising bank loan.
Solution
Books of Bon and Kon
Journal
Date
Particulars
L.F.
2003
June 30
" "
" "
" "
" "
Reserve a/c
Dr.
Pon's Capital a/c
(The share of Reserve Fund credited to him)
Interest a/c
Pon's Capital a/c
(Interest @ 12% credited to him for 3
months)
Dr.
Debit
Amount
(Rs.)
Credit
Amount
(Rs.)
2,400
2,400
720
720
Kon's capital a/c

Dr.
Bon's a/c
Dr.
Pon's Capital a/c
(Pon's share of goodwill transferred to his
capital a/c)
Profit and Loss a/c
Pon's Capital a/c
(Transfer of Pon's share of profit to his
capital a/c)
Dr.
Pon's Capital a/c

Pon's Executors a/c
(Pon's Capital a/c transferred to his
executor's a/c)
Dr.
9,600
6,400
16,000
777.78
777.78
43,897.78
43,897.78
189
Pon's Executor's Account

Dr.
Cr.
Date
2003
Particulars
J.F.
Amount
(Rs.)
June 30 Cash
43,897.78
Total
43,897.78
Date
2003
Particulars
J.F.
June 30 Pon's Capital
Amount
(Rs.)
43,897.78
Total
43,897.78
Pon's Capital Account

Dr.
Cr.
Date
2003
Particulars
J.
F.
June 30 Pon's Executor's
Amount
(Rs.)
43,798.78
Total
Date
2003
Particulars
June 30 Balance b/f

Reserve
Interest on
capital
Kon's capital
Bon's capital
Profit and loss
43,897.78
Total
J.
F.
Amount
(Rs.)
24,000.00
2,400.00
720.00
9,600.00
6,400.00
777.78
43,897.78
Notes to Solution
(1)
Interest on Capital
= Rs. 24,000
(2)
Share of Profit for 3 months
= Rs. 7,000
(3)
Goodwill :
Average Profit =
Profit
Profit
Profit
Total
Rs. 27,000
3
12
3
100
12
= Rs. 720
3
4
= Rs. 777.78
12
9
of 1999
of 2000
of 2001
Profit
=
=
=
=
Rs. 8,000
Rs. 12,000
Rs. 7,000
Rs. 27,000
= Rs. 9,000
Hence Goodwill = 9,000 4 = Rs. 36,000

Pon's Share of Goodwill = 36,000
4
= Rs. 16,000
9
Pon's share of Goodwill will be adjusted into the capital a/c's of Kon and Bon in
the gaining ratio of 3:2.
ACCOUNTANCY
190
Illustration 26
M, N and C are in partnership, sharing profit in the proportion of two-third, onesixth and one-sixth respectively. To clear the dues of deceased's partner an
assurance was effected on their lives jointly for Rs. 10,000 without profit, at an
annual premium of Rs. 650 to provide liquidity to the firm.
C died on June 30, 2002, three months after the annual accounts had been
prepared. In accordance with the partnership agreement, his share of the profits
to the date of death was estimated on the basis of the profits for the preceding
year. The agreement also provided for interest on capital at 10% per annum and
also for goodwill, which was to be brought into account at two years' purchase
of the average profits for the last three years, prior to charging the abovementioned insurance premiums, but after charging interest on capital.
C' capital on March 31, 2002, stood at Rs.10,000 and drawings from
then to the date of death amounted to Rs. 2,000. The net profits of the business
for the three preceding years amounted Rs. 3,350, Rs. 4,150 and Rs. 4,050,
respectively, after charging interest on capital and insurance premiums. The
premiums paid on policy are written off to Profit and Loss Account. You are
instructed to prepare C's capital account as at the date of death and also
prepare C's Executor's account.
Solution
C's Capital Account
Dr.
Date
2002
Cr.
Particulars
J.F.
June Drawings
30
C's Executors
Total
Amount
(Rs.)
Date
2002
Particulars
2,000.00
11,585.42
Mar.
31
June
Balance b/f
Interest on capital
M's Capital
N's Capital
Joint Life Policy
P and L
13,585.42
J.F.
Amount
(Rs.)
10,000.00
250.00
1,200.00
300.00
1,666.67
168.75
Total
13,585.42
C's Executor's Account

Dr.
Date
2002
Cr.
Particulars
Mar31 Balance c/f

Total
J.F.
Amount
(Rs.)
Date
2002
Particulars
11,585.42 Mar 31 C's Capital

11,585.42
Total
J.F.
Amount
(Rs.)
11,585.42
11,585.42
191

(i)
Interest on Capital = 10,000
(ii)
Goodwill = Average Profit 2

Average Profit
10
3
100
12
= Rs. 250
= (3,350 + 650) + (4,150 + 650) + (4,050 + 650)/3

= 13,500/3 = 4,500
Goodwill = 4500 2= Rs. 9,000

C's Share = 9,000
1
6
= 1,500 (adjusted to M and N's capital accounts in
the gaining ratio of 4:1

(iii) Joint Life Policy = 1,000
(iv)
1
= Rs. 1,666.67
6
Share in Profit for three months of current year :

Last year's Profit after charging insurance premium = 4,050
Share in Profit = 4,050
3
12
1
= 168.75
6
Terms Introduced in the chapter

l
Retirement of a Partner
Death of a partner
Gaining ratio
Joint Life Policy
Surrender Value
Executor of deceased partner.
Executor's account
Summary
1.
Matters requiring adjustments at the time of retirement/death of a partner :

Various matter which need adjustment in the books of firm at the time of
retirement/death are as follows :
l
New profit sharing ratio
Distribution of accumulated profit(losses)
ACCOUNTANCY
192
2.
Cancelation of goodwill and its accounting treatment.
Revaluation of assets and re-assessment of liabilities
Capital adjustment.
Amount due to retiring/deceased partners can be computed by considering

following items :
(a)
Credit balance of his capital account.
(b)
Credit balance of his current account.
(c)
Share in goodwill of the firm.
(d)
Share in reserves and accumulated profit (losses)
(e)
Share in gain (loss) on revaluation of assets and reassessment of liabilities.
(f)
Share in profits (losses) till the date of death/retirement.
(g)
Interest on capital till the date of death/retirement.
(h)
Share in Joint Life Policy.
(i)
Drawings, if any.
3.
Gaining Ratio : Ratio in which the continuing partners acquire the retired
deceased partners share is called gaining ratio.
4.
Surrender Value : Realisable value of an insurance policy on the event of the

surrender of the policy to the insurance company before the date of maturity.
5.
Joint Life Policy : Joint Life Policy is taken up by the firm on the lives of
partners collectively . This ensures the liquidity to the firm at the time of
death of partners.
Executor is a person who is entitled to the balance in deceased parner's capital
account.
6.
Question and Exercises

1.
Objective type Exercises
(a)
State whether each of the following statements is true or false :

(i)
Gain or loss on revaluation of assets at the time of retirement is a capital

profit.
(ii)
In the event of death, gain or loss on revaluation account is transferred

to the continuing partners in the new profit sharing ratio.
(iii) At the time of retirement/death the undistributed profits/loss and

reserves are distributed among existing partners in their old profit sharing
ratio.
(iv)
A partner can retire from the firm with the consent of all other partners.
(v)
In the event of death, the combined share of profit of continuing partners

will decrease.
(vi)
193
The amount due to the retiring partner will always be settled in cash.
(vii) The firm is under obligation to pay an agreed rate of interest for the
unpaid balance to the retiring partner.
(viii) A joint life policy matures in the event of death or at the time of retirement
of a partner.
2.
(ix)
Surrender value of the joint life policy is equal to the total amount of
premium paid till that date.
(x)
A family member of the retiring partner will automatically becomes the

new partner in a reconstituted firm.
Short Answer Questions

(i)
What are the different ways in which a partner can retire from the firm?
(ii)
Write the various matters that the need of adjustments at the time of
retirement of a partner.
(iii) Distinguish between sacrificing and gaining ratio.

(iv)
Why do firms revalue assets and reassess their liabilities on retirement

or on the event of death of a partner ?
(v)
Why a retiring/deceased partners entitled to a share of goodwill of the

firm ?
(vi)
Give two circumstances in which a gaining ratio is applied.
(vii) What is surrender value ?

(viii) Write the meaning of joint life policy.
(ix)
3.
What is the treatment of goodwill at the time of retirement or on the

event of death of a partner.
(x)
What is the objective of taking a joint life policy by the partners.
(xi)
What is the accounting treatment of the claim received on account of

joint life policy from
insurance company on the event of death of a
partner ?
Long Answer Questions

(i)
Explain the modes of payment to a retire partner.
(ii)
How will you compute the amount payable to a deceased partner ?
(iii) Explain the various methods of computing the share of profits in the
event of death of a partner.
(iv)
What do you mean by joint life policy ? Explain the methods of the
treatment of joint life policy.
(v)
Explain the accounting treatment of joint life policy when it is treated as

an assets by the firm.
ACCOUNTANCY
194
Problems
4.
Sharma, Verma and Neetu were partners sharing profits and losses in
proportion of
1
4
1
10
and
. Calculate the new profit sharing ratio between
8
16
continuing partners if, (a) Sharma retires, (b) Verma retires, (c) Neetu retires.
Also calculate their gaining ratio in each of the above situation.
5.
Madhu, Surabhi and Nikhil are partners without any partnership deed. Madhu
retire, calculate future ratio of continuing partners if they agreed to acquire
her share (i) in the ratio 5 :3 (ii) equally. Also mention their gaining ratio.
6.
Kanu, Manu and Akansha are partners sharing profits as 20%, 30% and
50%. Kanu decide to retire with the consent of other partners and sold her
share to Manu. Goodwill was valued at two and a half years purchase of the
average profits of three years. Profits of these three years were Rs. 50,000,
Rs. 70,000 and Rs. 60,000. Reserve fund stood in the balance sheet at Rs.
30,000 at the time of his retirement. You are required to record necessary
journal entries to record above ajustment on Kanus retirement. Also prepare
her capital account to find out the amount due to her when her capital balance
in the balance sheet was Rs. 1,00,000 before any above adjustment.
7.
A, B and C are partners in a firm sharing profits in the ratio of 2 : 1 : 1. They

took out a policy in 2002 of Rs. 1,40,000. On 21st March, 2003 B die. The
surrender value of the policy appearing in the books on that date was
Rs. 20,000. Record necessary journal entries to close the joint life policy in
the year of death of B, if premium paid was treated (i) as business expenses
and (ii) as an asset.
8.
Rita, Puneeta and Gita are partners sharing profits in the ratio of
1 : 2 : 3. Rita retires on the date of balance sheet on the following terms :
(a)
A computer costing Rs. 40,000 which ws not recorded earlier, to be

recorded now.
(b)
A liability of compensation towards an employee for Rs. 16,000 has also

been finanlised for payment.
Record necessary entires to record the above arrangement.

9.
R, S and M were carrying on business in partnership sharing profits in the

ratio of 3 : 2 : 1, respectively. On March 31, 1999, Balance Sheet of the firm
stood as follows :
195

Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
Sundry Creditors
Capitals :
16,000
Building
Debtors
23,000
7,000
Stock
Patents
Bank
12,000
8,000
6,000
R
S
M
20,000
7,500
12,500
40,000
56,000
56,000
Shyam retired on the above mentioned date on the following terms :

i)
Buildings to be appreciated by Rs. 8,800.
ii)
Provision for bad debts be made @ 5% on debtors.
iii)
Goodwill of the firm be valued at Rs. 9,000.
iv)
Rs. 5,000 be paid to S immediately and the balance due to him treated
as a loan carrying interest @ 6% per annum.
Record necessary journal entries and prepare the balance sheet of the
reconstituted firm.
10. Following is the balance sheet of Jain, Gupta and Malik as at March 31, 2002
Liabilities
Creditors
Telephone bills
outstanding
Accounts Payable
Accumulated profits
Capital accounts :
Jain
40,000
Gupta
60,000
Malik
20,000
Amount
(Rs.)
19,800
300
8,950
16,750
1,20,000
1,65,800
Assets
Amount
(Rs.)
Land and buildings

Bonds
Cash
Bills Receivables
Sundry Debtors
Stock
Office Furniture
Plant and Machinery
Computers
26,000
14,370
5,500
23,450
26,700
18,100
18,250
20,230
13,200
1,65,800
The partners have been sharing profits in the ratio of 5 : 3 : 2. Malik

decides to retire from business on April 1,2002 and his share in the business
is to be calculated as per the following terms of revaluation of assets and
liabilities :
Stock Rs. 20,000; Office furniture Rs. 14,250; Plant and machinery Rs. 23,530;
Land and buildings Rs. 20,000.
ACCOUNTANCY
196
A provision of Rs. 1,700 to be created for doubtful debts. The goodwill of the
firm is valued at Rs. 9,000.
The continuing partners agreed to pay Rs. 16,500 as cash on retirement of
Malik, to be contributed by continuing partners in the ratio of 3 : 2. The
balance in the capital account of Malik will be treated as loan.
Prepare Revalution account, capital accounts, and balance sheet of
reconstituted firm.
11. The Balance Sheet of A, B and C who were sharing the profits in proportion to
their capitals stood as on March 31, 2003.
Liabilities
Bills Payable
Sundry Creditors
Reserve Funds
Capitals :
A
20,000
B
15,000
C
15,000
Amount
(Rs.)
6,250
10,000
2,750
50,000
Assets
Land and Building
Customers
10,500
Less Reserve
500
Bills Receivable
Stock
Plant and Machinery
Bank Balance
69,000
Amount
(Rs.)
12,000
10,000
7,000
15,500
11,500
13,000
69,000
B retired on the date of balance sheet and the following adjustments were
made :
a)
Stock was depreciated by 10%.
b)
Factory building were appreciated by 12%.
c)
Reserve for doubtful debts be created upto 5%
d)
Reserve for legal charges to be made at Rs. 265.
e)
The goodwill of the firm fixed at Rs. 10,000.
f)
The capital of the new firm be fixed at Rs. 30,000. The continuing partners
decide to keep their capitals in the new profit sharing ratio of 3 : 2.
Record journal entries and prepare the initial balance sheet of

rconstituted firm after transferring the balance in Bs capital account to his
loan account.
12. On March 31, 2003, the balance sheet of Pawan, Qatir and Ram, who were
sharing profits in proportion to their capitals stood as follows :
197

Liabilities
Bills Payable
Creditors
General Reserve
Capitals :
Pawan
Qatir
Ram
Employees P.F.
Amount
(Rs.)
8,000
12,000
6,000
30,000
30,000
15,000
75,000
17,000
Assets
Land and buildings
Cash at Bank
Debtors 10,000
Less :
Provision for 200
Doubtful debts
Stock
Machinery
Profit and Loss
1,18,000
Amount
(Rs.)
50,000
30,000
9,800
14,000
8,200
6,000
1,18,000
Qatir retires and the following readjustments of the assets and liabilities have
been agreed upon before the assertainment of the amount payable to Qatir :
i)
That out of the amount of insurance which was debited entirely to profit
and loss account, Rs.1,292 be carried forward as unexpired insurance.
ii)
That the land and building be appreciated by 10%.
iii)
That the provision for doubtful debts be brought upto 5% on debtors.
iv)
That machinery be depreciated by 6%.
v)
That a provision of Rs. 1,500 have made in respect of any outstanding

bill for printing and stationery.
vi)
That be goodwill of the firm will be valued at Rs, 18,000.
vii)
That the entire capital of the firm as newly constituted be fixed at

Rs. 60,000 between Pawan and Ram in the proportion of three-fourth
and one-fourth after passing entries in their accounts for adjustment,
i.e. actual cash to be paid off or to be brought in by the continuing
partners as the case may be.
viii) That Qatir be paid Rs. 5,000 in cash and the balance be transferred to
his loan account payable in two eqaul annual instalments alongwith
interest 8% p.a.
Prepare necessary accounts and the balance sheet of the firm of Pawan
and Ram. Also prepare Qatirs loan till it is finally settled.
13. X, Y and Z were partners sharing profit in proportion of 3 : 2 : 1. Their Balance
Sheet on December 31, 2002 was as follows :
ACCOUNTANCY
198
Liabilities
Capitals :
X
Y
Z
Reserve
Bills payable
Creditors
Amount
(Rs.)
21,100
14,000
12,000
47,100
6,000
2,000
8,000
Assets
Building
Plant
Motor Car
Stock
Debtors
7,000
Less : Provision 1,000
Cash at Bank
63,100
Amount
(Rs.)
16,000
24,000
6,000
10,000
6,000
1,100
63,100
X retires on that date on the following terms :

i)
ii)
iii)
iv)
v)
vi)
The goodwill of the firm is to be valued at Rs. 12,000.

Stock and building are to be appreciated by 10%
Plant and Motor car are to be depreciated by 10%
Liability for the payment of gratuity to worker Rs. 4,800 is not yet recorded
in the books, but the same is to be provided for now.
Provision on debtors no more required.
The amount payable to X is to be paid in four equal annual instalments
beginning from January 1, 2003 with interst at 10% p.a.
You are require to prepare :

1)
2)
3)
Revaluation Account.
Partners capital accounts.
New Balance Sheet of Y and Z as at 1.1.2003 and Xs loan account till it
is finally paid.
14. Mishra, Puri and Khurana are partners in a firm sharing profits in proportion
1
1
1
,
and
respectively. The Balance sheet on April 1, 2003 was as
2 6
3
follows :
of
Liabilities
Bills payable
Sundry Creditors
Reserve
Capital account :
Mishra
30,000
Puri
30,000
Khurana
28,000
Total
Amount
(Rs.)
12,000
18,000
12,000
88,000
1,30,000
Assets
Freehold premises
Machinery
Furniture
Stock
Sundry debtors 20,000
Less Reserve
1,000
for bad debts
cash
Total
Amount
(Rs.)
40,000
30,000
12,000
22,000
19,000
7,000
1,30,000
Khurana retires from the business and the partners agree to the following
revaluation :
199
a)
Freehold premises and stock are to be appreciated by 20% and 15%

respectively.
b)
Machinery and furniture are to be depreciated by 10% and 7%

respectively.
c)
Bad debts reserve is to be increased to Rs. 1,500.
d)
A goodwill is valued at Rs. 21,000 on Khuranas retirement.
e)
The continuing partners have decided to adjust their capitals in their

new profit sharing ratio after retirement of Khurana. Surplus/deficit, if
any, in their capital accounts will adjust through current accounts.
Prepare necessary ledger accounts and draw the Balance Sheet of reconstituted
firm.
15. Paul, Gopal and Verma was partners sharing profits in the proportion of onehalf, one-third and one-sixth respectively. The Balance Sheet of the firm as
on 31.3.2003
Liabilities
Bills payable
Sundry creditors
Reserve fund
Capitals :
Paul 4,00,000
Gopal 3,00,000
Verma 2,50,000
Amount
(Rs.)
40,000
1,90,000
1,20,000
9,50,000
Assets
Amount
(Rs.)
Cash
Debtors
1,60,000
Less Reserve 5,000
Stock
Motar Van
Plant and Machinery
Factory Building
13,00,000
15,000
1,55,000
2,50,000
80,000
3,50,000
4,50,000
13,00,000
Gopal retires on that date subject to the following adjustments :

1)
2)
The goodwill of the firm to be valued at Rs, 1,80,000.

The reserve for doubtful debts to be increased by Rs. 19,500.
3)
Stock to be appreciated by 20% and building by 10%.
4)
Plant to be depreciated by 10% and Motor Van by 15%.
5)
Gopals account will be settled immediately on his retirement and the

continuing partners share contribute cash in such a manner so that
their capitals become proportionate to their new profit sharing ratio. For
the purpose of payment to Gopal, existing cash may be utilised after
keeping Rs. 5,000 for working capital.
Record journal entries, give capital accounts of partners and the Balance
Sheet of continuing partners as on April 1, 2003.
16. Lily and Bily who shared profit in the ratio of 7 : 3 took out a Joint Life Policy
on May 1, 1999 for Rs. 1,30,000. The annual premium was Rs. 5,200. The
surrender value of the policy was :
ACCOUNTANCY
200
1999 Nil, 2,000 Rs, 1,600, 2001 Rs. 7,450, 2002 Rs. 9,450, Bily died on
September 15, 2002 and the amount of the policy received on December 31,
2002. The books are cloed on March 31st each year.
Record necesary journal entries, when premium paid is treated (i) as an expense
(ii) as an asset. Also prepare joint life policy account.
17.
P, Q and R sharing profit in the ratio of 2 : 3 : 5 took out a joint life policy for
Rs. 30,000 paying an annual premium of Rs. 4,000 starting from 16th April,
1998. The surrender value of the policy was as follows :
1998
1999
2000
Nil
400
1,000
2001
2002
1,700
3,000
P died on October 6, 2002 and the insurance company paid Rs. 31,200 including
bonus due on November 30,2002. The books of the firm were closed on March
31, each year. Show the account relating to joint life policy, when premium
paid are to be treated as an asset.
18.
Arti, Bharti and Seema are partners sharing profits in the proportion of 3 : 2 : 1
and their Balance Sheet on March 31, 2003 stood as follows :
Liabilities
Bills Payable
Creditors
General Rerserve
Capitals :
Arti
20,000
Bharati
12,000
Seema
8,000
Amount
(Rs.)
Assets
Amount
(Rs.)
12,000
14,000
12,000
Buildings
Cash in Hand
Bank
Debtors
Bills recevable
Stock
Investment
21,000
12,000
13,700
12,000
4,300
1,750
13,250
40,000
78,000
78,000
Bharati died on June 12, 2003 and according to the deed of the said partnership
her executors are entitled to be paid as under :
i)
The capital to her credit at the time of her death and interest thereon
@ 10% per annum.
ii)
Her proportionate share of reserve fund.
iii)
Her share of profits for the intervening period will be based on the sales
during that period, which were calculated as Rs. 1,00,000. The rate of
profit during past three years had been 10% on sales.
iv)
Goodwill according to her share of profit to be calculated by taking twice
201
the amount of the average profit of the last three years less 20%. The
profits of the previous years were :
2001
2002
2003
19.
Rs. 8,200
Rs. 9,000
Rs. 9,800
The investment were sold for Rs.16,200 and her executors were paid out. Pass
the necessary journal entries and write the account of the executors of Bharti.
On December 2002 31, the Balance sheet of P, Q and R showed as under :
Liabilities
Sundry Creditors
Reserve fund
Capitals :
P
15,000
Q
10,000
R
10,000
Amount
(Rs.)
Assets
Amount
(Rs.)
25,000
20,000
Buildings
Investments
Debtors
Bills receivable
Stock
Cash
26,000
15,000
15,000
6,000
12,000
6,000
35,000
80,000
80,000
The partnership deed provides that the profit be shared in

2 : 1 : 1 and that in the event of death of a partner, his executors be entitled
to be paid out :
a)
The capital of his credit at the date of last balance sheet
b)
His proportion of reserves at the date of last Balance Sheet
c)
His proportion of profits to the date of death based on the average profits
of the last three completed years, plus 10% and
d)
By way of goodwill, his proportion of the total profits for the three
preceding years.
The net profit for the last three years were :

2000
16,000
2001
16,000
2002
15,400
R died on April 1, 2002. He had withdrawn Rs. 5,000 to the date of his death.
The investment were sold at par and Rs Executors were paid off.
Show the necessary ledger accounts and the Balance Sheet of the surviving
partners P and Q.
20. Mansi and Puneet are in partnership sharing profits and losses
3 : 2. They insure their lives jointly for Rs. 75,000 at an annual premium of
ACCOUNTANCY
202
Rs. 4,400 charged to the business. Puneet dies three months after the date of
the last Balance Sheet. According to the partnership deed, the legal
representatives of Puneet are entitled to the following payments :
a) His capital as per the last Balance Sheet.
b) Interest on above capital at 8% per cent per annum to date of death.
c) His share of profit to date of death calculated on the basis of last three
years profits.
His drawings are to bear interest at an average rate of 1 per cent on the
amount irrespective of the period.
The net profits for the last three years, after charging insurance premium,
were Rs. 20,000, Rs. 25,000 and Rs. 30,000 respectively. Puneets capital as
per balance sheet was Rs. 40,000 and his drawing to date of death were
Rs. 2,000.
Draw Puneet account to be rendered to his representatives.
21. Following is the balance sheet of Tony, Sony and Romy as on March 31,
2003
Liabilities
Sundry Creditors
General Reserve
Capital Accounts :
Tony
30,000
Sony
20,000
Romy
20,000
Total
Amount
(Rs.)
Assets
Amount
(Rs.)
16,000
16,000
Bills Receivable
Furniture
Stock
Sundry debtors
Cash at Bank
Cash in Hand
16,000
22,600
20,400
22,000
18,000
3,000
70,000
1,02,000
Total
1,02,000
Sony died on June 30, 2003. Under the terms of the partnership deed, the
executors of a deceased partner were entitled to :
a)
Amount standing to the credit of the partners capital account.
b)
Interest on capital at 5% per annum.
c)
Share of goodwill on the basis of twice the average of the past three
years profit, and
d)
Share of profit from the closing of the last financial year to the date of
death on the basis of the last three years profit.
Profits for 2001, 2002 and 2003 were Rs. 12,000, Rs. 16,000 and
Rs. 14,000 respectively. Profits were shared in the ratio of capitals.
Record the necessary journal entries and draw up the Sonys Account to
be rendered to his executors.
22.
203
Nithya, Sathya and Mithya were partners sharing profits and losses in the
ratio of 5 : 3 : 2. Their Balance Sheet as on December 31, 2002 was as follows
:
Liabilities
Creditors
Reserve Funds
Capital Accounts
Nithya
Sathya
Mithya
Amount
(Rs.)
14,000
6,000
:
30,000
30,000
20,000
80,000
Assets
Investments
Goodwill
Premises
Patents
Machinery
Stock
Debtors
Bank
1,00,000
Amount
(Rs.)
10,000
5,000
20,000
6,000
30,000
13,000
8,000
8,000
1,00,000
Mithya dies on 1.5.2002. The agreement between the executors of Mithya and
the partners stated that :
a)
Goodwill of the firm be valued at 2
1
2
times the average profits of last
four years. The profits of four years were : 1998 Rs. 13,000, 1999
Rs. 12,000, 2000 Rs. 16,000 and 2001 Rs. 15,000
b)
The patents are to be valued at Rs, 8,000, Machinery at Rs. 25,000 and
premises Rs.25,000
(c)
The share of profit of Mithya should be calculated on the basis of the

profit of 2002.
d)
Rs. 4,200 should be paid immediately and the balance should be paid in 4
equal half-yearly instalments carrying interest @ 10%.
Record the necessary journal entries to give effect to the above and write the
executors account till the amount is fully paid. Also prepare the balance
sheet of Nithya and Sathya as it would appear on 1.5.2002 after giving effect
to the adjustments.
23. The Balance Sheet of X, Y, Z as on 31.12.2002 was as follows :
Liabilities
Bills Payable
Creditors
General Reserve
Loans
Capital Accounts
X
Y
Z
Amount
(Rs.)
2,000
5,000
6,000
7,100
:
22,750
15,250
12,000
Assets
Cash at Bank
Bills Receivable
Stock
S. Debtors
Furniture
Plant and Machinery
Building
Amount
(Rs.)
5,800
800
9,000
16,000
2,000
6,500
30,000
50,000
70,000
70,000
ACCOUNTANCY
204
The profit sharing ratio was 3 : 2 : 1. Z died on April 30, 2003, the partnership
deed provides that :
i)
Goodwill is to be calculated on the basis of 3 years purchase of the four

years average profits. The profits were :
2003
= Rs.14,000
2002
= Rs.16,000
2001
= Rs.20,000
2000
= Rs.10,000
ii)
The deceased partner to be give share of profit up to the date of death on

the basis of profits for previous year.
iii)
The assets have been re-valued as under :

Stock Rs. 10,000, Debtors Rs.15,000 ; Furniture Rs.1,500 ; Plant and
Machinery Rs. 5,000 : Building Rs. 35,000. A bill for Rs. 600 was found
worthless.
iv)
A sum of Rs. 12,900 was paid immediately to Zs executors and the

balance to be paid in two equal annual instalments together with interest
at 10% on the amount outstanding.
Give journal entries and show Zs executor account.
Answers
4.
(a)
(b)
(c)
New Ratio
1
5
Gaining Ratio
1
5
New Ratio
2
5
Gaining Ratio
2
5
New Ratio
2
1
Gaining Ratio
2
1
5.
6.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
20.
21.
22.
23.
(a)
New Ratio
= 13:8
Gaining Ratio
=
1:1
(b) New Ratio
=
1:1
Gaining Ratio
=
1:1
Amount due to Kanu Rs. 1,36,000
Balance Sheet : Total Rs 59,450
Loss on revaluation : Rs. 6,500; Balance Sheet : Total Rs. 1,59,300
Loss on revaluation : Rs. 400; Balance Sheet : Total Rs. 62,220
Profit on revaluation : Rs. 4,000; Balance Sheet : Total Rs. 1,32,300
Loss on revaluation : Rs. 4,200; Balance Sheet : Total Rs. 63,700
Balance Sheet : Total Rs. 1,47,730
Balance Sheet : Total Rs. 13,18,500
Lily share : Rs. 77,385
Billy share : Rs. 33,165
P Rs. 5,100; Q Rs. 7,650; R Rs. 12,750
Amount paid to Bharti Executor's Rs. 22,916
Amount payable to Puneet executor's Rs. 71,780
Amount payable to Sony executor's Rs. 33,821
Balance Sheet : Total Rs. 92,800
Z's Executor's account Rs. 4,221
Revaluation profit : X Rs. 2,200; Y Rs. 1,467; Z Rs. 733.
205

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CHAPTER 4

RECONSTITUTION OF A PARTNERSHIP FIRM

Calculate new profit-sharing

Describe the accounting

Explain the accounting

Explain the accounting

Prepare the retiring/deceased

Prepare the Balance Sheet of

On the retirement or death of a partner,

RETIREMENT AND DEATH OF A PARTNER

4.1 Ascertaining the amount of sum due to

Balance in his capital/current account;

Share of accumulated profits (losses) and reserves;

Share in the gain/loss on revaluation of assets and reassessment of

Share in the profits of current year;

Share in joint life policy;

At the time of retirement or death of a partner, we need to compute the

Revaluation of assets and reassessment of liabilities

Distribution of accumulated profits (losses) and reserves

Capital adjustments (if any).

It is to be noted that the continuing partners may also sacrifice on

RETIREMENT AND DEATH OF A PARTNER

Calculation of New Profit Sharing Ratio

New share of Rita and Raj (If Sita retires) :

Rita's new share

Raj's new share

Therefore, New profit sharing ratio = 3 : 2

New share of Sita and Rita (If Raj retires) :

in their old profit sharing ratio.

Rita's new share

Therefore New profit sharing ratio

(iii) New share of Sita and Raj (If Rita retires) :

Raj in their old profit sharing ratio.

Raj's new share =

Therefore new sharing ratio is 5 : 2

Calculation of Gaining Ratio

Gaining ratio of Rita and Raj :

Raj's gain = New share Old share

Gaining ratio of Sita and Rita :

Therefore, the gaining ratio of Sita & Rita will be 5 : 3

Raj's gain = New share Old share

Therefore, gaining ratio of Sita and Raj will be 5 : 2.

Illustration 2 (Calculation of new profit sharing ratio)

RETIREMENT AND DEATH OF A PARTNER

When Ajay's share is taken up equally by Vijay and Veena

Share acquired from Ajay

New share of Vijay

Veena's share in profit

Share acquired from Ajay

Veena's new share

Therefore, Ratio of Vijay and Veena 7 : 5

When Ajay's share is taken up in 3 : 2 ratio

Share acquired from Ajay

Vijay New share

Share acquired from Ajay

Veena's new share

Therefore, Ratio of Vijay and Veena 19 :11

Illustration 3 (Calculation of new profit sharing ratio and gaining ratio)

Share acquired by Naresh

and Onkar from Mahesh

(iii) New Ratio = i + ii

2 : 1 [As Calculated in (ii)]

Illustration 4 (Calculation of new profit sharing ratio)